Making sense of the markets this week: January 7, 2024

A look at 2024

Since we made this crystal ball thing look pretty easy last year with our 2023 markets forecast, we’re at it again for 2024. And, it’s always good to begin a market predictions column with the caveat that this stuff is really hard to do.

It’s impossible to make accurate predictions consistently, especially about the markets, as there are just too many variables at play to always get it right. I mean, if you could tell me the outcomes of wars, upcoming elections, more pandemics and unexpected natural disasters of 2024, then I could give my some predictions with a little more confidence. 

All that said, there are some big-picture trends and general rules of thumb that Canadian investors can apply to their thinking about the year ahead. 

So, with those caveats out of the way, here’s a look at how we see the markets playing out this year.

Canada’s TSX 60 will gain 15%, outperforming the 8% gain for the S&P 500

It’s not that Canada’s economy is going to do better than America’s, or that our domestic companies have any hidden advantages. A prediction for TSX 60 outperformance is simply a bet that lower valuations may suffer less from the negative headlines than any higher-priced valuations of the S&P 500 composite index.

The 500 biggest companies in the U.S. had a fabulous 2023 and finished up 23% for the year. The markets always look ahead, true, and I think they foresaw sunny skies for late 2024 as early as spring 2023. Consequently, there would have to be additional excellent news coming to light for a repeat of such a strong year.

Canada, on the other hand, saw its TSX 60 index go up about 8%. There were a lot of negative headlines about lack of economic growth in Canada, and no equivalent of an “AI bubble” to drive a positive narrative for boring companies like Canadian railways or pipelines.

Right now, a TSX 60 exchange-traded fund (ETF), such as XIU, trades at about a price-to-earnings (P/E) ratio of 13x. An S&P 500 ETF, like SPY, clocks in at about 24x. I don’t think there’s any debate that the U.S. has more world-beating companies and a much more favourable tax environment than Canada. But are American companies that much better that they should be valued so much higher? Based on historical averages, we’re betting no.

Ultimately, we think it could be a really good second half of the year for Canadian stocks, with the TSX 60 up 15% in 2024. The S&P 500 may be a little more volatile than the TSX 60, and will ultimately finish up about 8%.

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Tech stocks will underperform the TSX Composite

In 2023, the worst Magnificent 7 stock (Apple) saw gains of 49%, while artificial intelligence (AI) front runner Nvidia led the way with gains of about 240%. In Canada, Shopify and Constellation Software had gains of 97% and 52% respectively. Every company in the world competed to see how many times it could mention AI in its earnings calls in an effort to seem cutting edge. (You can read more about my thoughts on Canadian tech stocks at MillionDollarJourney.ca.)

Meanwhile the TSX Composite was up a boring 8% in 2023. 

Much like the USA-versus-Canada prediction above, this one is not a matter of tech stocks being worse companies than Canadian financials or energy giants. It’s about current valuations. Tech had a great year in 2023, but a lot of stock price gains got “pulled forward” in the speculation surrounding AI.

On the flip side of the same coin, Canadian companies in “boring” sectors—like banking, insurance, utilities, pipelines, telecommunications and railways—were all negatively affected by higher debt costs and investors’ newfound option of getting solid yield from fixed-income products. But it’s not like those companies suddenly stopped making money.

Consequently, I think we’ll see a rotation back to boring in the latter half of 2024, especially here in Canada. That said, I wouldn’t be surprised if animal spirits kept the tech rally going for several months, just based purely on speculation.

The electoral elephant in the room and its effect on the markets—and everything else for much of 2024

The major news story in 2024 will inevitably be about the U.S. election. Now, despite all the negative headlines that accompany every election cycle, U.S. election years have typically been quite solid for the U.S. stock markets.

That said, this election cycle is not like the others. We try to leave politics out of this column as a general rule. Personally, I’ve been accused of being biased for and against all of Canada’s political parties at one time or another. 

The current situation in the USA, though, demands clear and concise language, as the ramifications could be potentially awful. It should be impossible to remain neutral on the candidacy of Donald Trump. He represents an existential threat to the very institutions that make functioning markets possible. His narcissism and complete disregard for honourable public service, as well as his comfort with crowd violence, create a terrifying world of possibilities. I think there is a small—but not zero—chance that he may try to illegally seize the election again and could cause widespread civil unrest as a result. 

There is, of course, also a very legitimate chance he could win. 

In that case, I believe we’d likely avoid violent civil unrest, but we’d enter the incomprehensible world of a 78-year-old authoritarian. It could be awful for world trade—and likely for the Canadian economy. It would likely be pretty bad for long-term U.S. productivity as well. 

I do not think it’s a given that Trump would obey term limits and step aside at the end of four years. What evidence do we have that Trump respects any sort of norms or rules? Overall, the chaos and uncertainty that a second Trump Presidency would bring to the table would be terrifying for the world, and pretty bad for investment portfolios in the long term.

I do believe that despite very negative current polling, when push comes to shove (perhaps literally), President Joe Biden will narrowly win a second term. I think there’s a very strong probability that the Republican Party will win control of the Senate, creating a deadlocked government. 

This would be a Goldilocks scenario for U.S. companies—a political situation that’s not too hot, not too cold. You’d have the relatively steady Biden hand at the tiller, who’s been great for the economy by the way. And you’d benefit from the paralysis of divided government, which almost always generates positive vibes from corporations that enjoy entrenched advantages.

Should President Biden win and Republicans control the Senate, I think there would be a fantastic end of the year for the U.S. stock markets. Canadian stocks will likely get dragged along for the ride, to some degree. If Trump were to win, it’s possible there will be a short-term sugar spike in the markets, as tax reductions could be anticipated. But it’s difficult to judge what effects the chaos of destroying democracy will unleash.

Flatlining GDP numbers generating more talk of “Is it a recession or not?” 

Last year, we predicted that overall GDP (gross domestic product) in Canada would hang right around 0% for multiple quarters, and that different parties would try to “spin” that information in ways that made it seem more or less a failure. Our crystal ball shows more of the same in 2024. 

While GDP may fluctuate between -0.3% and 0.5% for at least the first two quarters of the year, some Canadian commentators will scream about “recessions” and others will try to avoid using the term at all costs.

Whether or not you call it a recession, the fact is Canadians’ per-capita GDP (and consequently, our standard of living) is regressing. We covered the per-capita GDP decrease a few weeks ago. 

Unfortunately, given the fact our government, at all levels, seems incapable of addressing the difficult decisions and tradeoffs surrounding productivity increases, I don’t see this trend reversing in 2024.

Four quick hitters for 2024

Here’s four more unconnected thoughts about how 2024 might unfold.

Oil prices may stay below $85 USD per barrel 

Increased non-OPEC (Organization of the Petroleum Exporting Countries) supply, and declining demand due to recessionary pressures around the world, won’t lead to much of an increase in the cost of oil. 

Inflation should continue to go down—thanks to gas prices

Because oil prices are low, headline inflation will continue to trend down, but core inflation is going to be stickier. As long as oil prices stay in check, then gasoline and food price increases should keep quite moderate. However, the increased costs of labour—driven by massive new wage hikes we’ve seen negotiated over the last couple of years—will continue to push inflation in many industries. This stubborn core inflation will make it difficult to cut rates by any more than the current widespread prediction of 0.75%. 

Tesla could finish the year down 30%

Tesla is selling more vehicles than ever (about 1.8 million in 2023), so why are we so down on the stock? Here are five reasons:

• Tesla’s profit margins are way down.
• Electric vehicle (EV) competition is way up (Chinese EV rival BYD is producing more cars than Tesla).
• The North American auto market is proving more reluctant to embrace EVs than many hoped.
• It could be argued that Tesla CEO Elon Musk looks to be doing his best to destroy the incredible brand reputation advantage that the EV company had built up in its early years. Having your founder publicly focused on X (formerly Twitter), cyber trucks and racist ponderings are great ways to erode your vehicle company’s reputation, despite being so solid it didn’t even need to pay for advertising.
• Tesla’s stock price doubled in 2023 and has always been lofty. Right now, the P/E ratio is still at a nosebleed-ingly high 77x. The amount earnings would have to increase to justify that valuation is nothing short of a miracle.

Crypto may go down but it will go back up again

Bitcoin could drop 20% at some point, but should finish the year up 50%. Loyal readers of this column might be surprised to see me make such a bullish prediction on bitcoin, since I often condemn the asset. Rest assured, I’m still quite skeptical of cryptocurrencies and have yet to see a convincing use case. 

That said, predicting irrational behaviour has a rationality all its own, right? The folks who didn’t sell their bitcoins—despite seemingly every major company and key individual in the crypto space going bankrupt or to jail over the last couple of years—must be true believers. Those converts put a certain floor under the value of bitcoin—if not other cryptocurrencies. And that might be all that’s required to re-start the various speculative narratives on which bitcoin thrives. 

By the end of 2024 we’ll be no closer to finding a legal reason to use bitcoin for anything, but we’ll be right back in the FOMO-driven world of news stories about people getting rich overnight by betting on BTC. That will lead to a speculation spiral that will inevitably make a few gamblers rich, and see many more lose their money as the next crash will be just around the corner.

About Kyle Prevost

Kyle Prevost is a financial educator, author and speaker. He is also the creator of 4 Steps to a Worry-Free Retirement, Canada’s DIY retirement planning course.

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