Spring 2024 Market Update
Investment markets continued their impressive march higher in the first quarter of 2024, with euphoric returns in tech-related stocks continuing to exceed expectations. Namely, NVIDIA and Meta (formerly known as Facebook). While market breadth has improved in 2024, mega-cap stocks with ties to artificial intelligence continue to defy gravity. This has resulted in markets reaching all-time highs again in 2024, with the Dow, NASDAQ, S&P 500, and TSX all reaching that mark in the quarter. Markets appear to be responding to a continuous flow of positive economic data, leading many to question if a recession – whether a soft or hard landing – is still on the table for 2024. While market optimism has resulted in good returns for portfolios so far in 2024, it’s created a good opportunity for rebalancing and taking profits.
Central bank interest rate policy continues to be the most closely followed economic story globally. The Bank of Canada and the U.S. Federal Reserve maintained their overnight interest rates at 5% and 5.50%, respectively. Market expectations for interest rate cuts have been pushed further out in both Canada and the U.S., though Canada looks primed to cut first. We’ve begun to see a divergence between inflation in Canada and the U.S., as CPI in Canada has surprised to the downside twice to start 2024, while U.S. inflation has become more stubborn. This stubbornness has resulted in flat to negative bond market performance for the quarter.
Bitcoin ETFs were the talk of the first quarter, with the SEC approving spot price Bitcoin ETFs for the first time. This resulted in impressive flows into the space, pushing prices to all-time highs. Impressively, the total assets of the 11 spot Bitcoin ETFs surpassed the largest gold ETF (GLD) in less than two months of trading, showing the demand retail investors had for a regulated Bitcoin investment option.
As we look ahead to the next three quarters of 2024, we continue to keep an eye on the effects of meaningfully higher interest rates on the economy globally. Stubborn inflation in the U.S. has created another opportunity to add to fixed income in portfolios. This opportunity, coupled with impressive stock market performance, creates a great opportunity for rebalancing as it’s unlikely that the stock market will continue its impressive march higher. We continue to favour an overweight to high quality fixed income investments within our portfolios as we look to further benefit from higher rates, and eventually, the decline of those benchmark rates. After seeing improved returns in fixed income in late 2023, returns have flattened out in the first quarter of 2024. We expect fixed income returns to continue to improve throughout 2024.
Same-Same But Different
While rising interest rates often stoke fears of stock market decline and stalling economic growth, the reality is that investment markets generally continue to do well following central bank hiking cycles. As you can see in the chart below, the S&P 500 and U.S. 10-year Treasuries have both seen positive returns in the two years following the last interest rate hike in most previous cycles:
Notably, on the right, we can see the return of the U.S. 10-year Treasury, considered to be virtually ‘risk free’, averaging slightly below 10% annualized over 2 years. This helps illustrate our interest in fixed income in our portfolios today, as that return should be meaningfully higher with other investment grade fixed income options.
As with all market commentary – past performance doesn’t indicate future returns, but while history doesn’t repeat itself; in the markets, it usually rhymes. We can look to previous hiking cycles to help guide our investment decisions going forward.
Introducing the Tax-Free First Home Savings Account (FHSA)
The FHSA offers Canadian residents at least 18 years of age who are prospective first-time home buyers the ability to contribute up to $40,000 tax-free. Contributions to an FHSA are tax-deductible, like an RRSP, while income, gains, and withdrawals toward the purchase of a home are tax-free, like a TFSA.
Advantages:
- Contribute $8,000 annually, up to a maximum of $40,000 tax free. Contribution room starts accumulating the year the FHSA is opened, and unused amounts of up to $8,000 can be carried forward from past years.
- Tax deductions do not need to be claimed in the year a contribution was made and can be carried forward indefinitely and deducted in a later year.
- Withdrawals for qualifying home purchases are tax-free.
- The FHSA can be used in combination with a TFSA and/or the RRSP Home Buyers’ Plan (HBP) toward the same qualifying home purchase.
- If funds aren’t ready to be used to purchase a first home within the 15-year period, they can be transferred to an RRSP and later withdrawn under the HBP or put toward retirement savings.
- Conversely, RRSP contributions can be transferred to an FHSA tax-free, although this wouldn’t provide a tax deduction nor reinstate RRSP contribution room.
The FHSA is a great tool to help young people and their parents prepare for future first home purchases. Reach out to a member of our team if you’d like to open FHSA for yourself or your children.
2023 Tax Slip Checklist
As of publishing, our clients should have received most tax slips. As a reminder, for clients of Brett’s, you can expect two sets of slips for 2023 – some from National Bank, and some from CI Investment Services. Clients of Adam may receive tax slips from ScotiaMcLeod and CI Investment Services, depending on when accounts were moved to Cox Private Wealth. Below is a list of potential slips you could receive, their dates, and their descriptions:
If you are missing tax information or have questions about documents you’ve received, please reach out to a member of our team to assist you.
Performance chart source: https://am.jpmorgan.com/ca/en/asset-management/institutional/insights/market-insights/guide-to-the-markets/