Although there were predictions to the contrary, the first quarter of 2024 saw continued U.S. economic growth. This growth has come despite a sharp increase in interest rates throughout 2022 that have remained elevated over the past 18 months. The rise of interest rates first enacted by global central banks in 2022 has largely succeeded in taming inflationary pressures. The U.S. Federal Reserve and other central banks have stopped rate hikes and are now discussing reversing course at a pace that supports growth without restoking inflation.

Global equity markets have rallied in the past quarter with many major indices reaching record highs. Over the quarter, company earnings reports and the strong EPS (earnings per share) growth posted in Q4 are also driving the equity markets upward. The S&P/TSX posted a performance of 5.77%. The U.S. indexes performed better with a return of 10.16% for the S&P500 and 9.11% for the NASDAQ. It’s worth noting that most of the recent gains have been delivered by a narrow set of mega-cap technology stocks, a trend that began in 2023 and has extended to the first quarter of 2024. The equal-weighted S&P 500 Index, which neutralizes the impact of these mega-cap technology companies, was only up 3% this year, which is more consistent with returns in the rest of the world.

Following Jerome Powell's speech last December, in which the Federal Reserve Chair suggested an end to rate hikes and the potential for rate cuts, bond prices rallied. The price rally led to an initial decline in the yield of the benchmark U.S. 10-year from 4.25% down to 3.80% (the return or yield of fixed income investments moves in the opposite direction of prices). However, since those December statements, data has continued to point to a stronger-than-expected economy, and while inflationary pressures are abating, they remain elevated when compared to the 2% target espoused by the Federal Reserve. This has pushed back expectations for both the pace and magnitude of potential future rate cuts. As such, yields have naturally started to rise again over the quarter. These elevated yields again represent an opportunity for fixed income investments to provide an attractive risk-adjusted rate of return.

Global economies have lagged the U.S. as evidenced by slowing growth in most major regions over 2023. Canada’s gross domestic product (GDP) remained flat in the second half of last year, while the economies of Japan, Germany and the UK fell into technical recession (two consecutive quarters of declining real GDP growth). In contrast to the U.S., the stagnant economic growth has helped curtail inflationary pressures to a larger degree and thus provided central banks with the ability to end restrictive monetary policies. This was evidenced by the Swiss National Bank, the first central bank in the G10 to cut rates.

The allocation within portfolios of stocks, bonds and cash includes both strategic and tactical elements. Strategic asset mix addresses the mix of the major asset classes offering the risk/return tradeoff best suited to an investor’s profile as determined by their investment time horizon, risk tolerance, objectives, and financial situation. These five profiles range from very conservative through balanced to aggressive growth. Earlier this year we instituted a small tactical change to our fixed income allocation by reducing exposure to government bonds and initiating a position to corporate bonds. Beyond this tactical change, our strategic allocations across all five portfolios remain unchanged.

Portfolio performance for our 5 Standard and 5 Responsible Investing Portfolio as of the end of March 2024 can be found here: https://www.rbcinvestease.com/etf-portfolios/index.html