What’s likely in store for markets in 2024?

A good gauge of the health of the global economy is our heatmap of the Markit PMIs, which represents the makeup of the respective business sector for the private sector across the world. The heatmap uses colour to simplify the global manufacturing story. Green is good, yellow is neutral, and red is bad.

The table gives a two-year snapshot of the global economy. U.S. and global economic activity are slowing materially and are now indicating an elevated risk of a recession. As long-term investors, we think this “recession or no recession?” framing is unhelpful at best and, at worst, can stand in the way of investment returns. Instead, a more thoughtful approach is needed.

While we believe that we’re likely to experience a slowdown in the early parts of 2024, a resilient U.S. consumer, tight labour market versus history, and stable corporate balance sheets should result in a shallow slowdown.

For a deep dive into our team’s broader macroeconomic trends for 2024, click HERE to read more.

A snapshot of the global manufacturing sector
Image of a global economic heat map showing the monthly readings of the Manufacturing Purchasing Managers’ Index of key economies around the world from November 2021 to November 2023.  The image suggests that the manufacturing sector in Canada and most of Europe has moved into contractionary territory by November 2023. The manufacturing sector in Mexico, India, Indonesia, and Saudi Arabia remained in expansionary territory while the U.S. manufacturing sector slid to neutral territory by the end of the period.
Source: Bloomberg, Manulife Investment Management, Capital Markets Strategy. As of December 31, 2023.

Has the fight against inflation been won?

A material and global disinflation took hold in 2023, but 2024 will likely show that the last leg of the inflation battle is more difficult because central banks will, in our view, ultimately begin easing before inflation definitively returns to target, thereby risking a reacceleration in demand and a possible reemergence of mild inflationary pressure.

Central banks are faced with an uncomfortable predicament: Do they ease in the face of deteriorating growth despite the likelihood that inflation is still materially above target? We expect that, ultimately, they'll concede that their blunt tools aren't the right ones to solve this environment and that they’ll ease into a recession providing tailwinds for bonds.

This realization will likely be driven by the very nature of present-day inflation: Central bank tools are designed to cool demand-driven inflationary pressure but are less effective against supply shocks, regardless of whether these shocks are caused by enhanced pandemic-related protocols, climate change, or geopolitical tensions. Certain central bankers have already conceded the point, outlining their constrained ability to countermand external shocks.

The consequence of this dynamic is that policymakers are likely to relent in the face of weaker growth and choose to reduce restrictive policies to counterbalance a softening economy.

Global central bank rates are expected to fall in 2024
A line chart of policy rates in the United States, the United Kingdom, Canada, Japan, and the euro area from December 2010 to December 2023, including projections till end of 2024. The chart shows that policy rates in these economies are expected to fall in 2024.
Source: Fed, BoC, ECB, BOJ, BoE, RBA, Riksbanken, Macrobond, Manulife Investment Management, as of 12/7/23.

What is the outlook for equities in 2024?

Over the near term, we continue to expect a similar environment for equities as we outlined in our Q3 2023 themes, where investors should prepare for near-term volatility amid uncertainty. When looking at return potential for equities, it’s important to look at both earnings and valuation; however, now is not the time to feel paralyzed as an investor. In fact, historical performance would suggest that this could be an opportunity for investors.

What will the earnings environment look like in 2024?

We expect earnings growth will likely be a source of concern for equity markets during the early parts of 2024.

Despite sluggish revenue growth in the back half of 2023, earnings proved to be resilient and surprised to the upside as executives were able to implement expense management initiatives. Moving forward, earnings growth is unlikely to benefit from further expense management, leading to S&P 500 Index profit margins likely to come under pressure from current elevated levels of nearly 12.0%. The fear is that margins will be squeezed by higher wages, elevated levels of interest rates, and slower growth.

We believe that margins are more likely to face pressures from slower growth rather than high wages and price pressures. U.S. wages have already begun trending lower measured by the Federal Reserve Bank of Atlanta’s Wage Tracker that peaked at 6.7% growth during the summer of 2022 and has fallen to 5.2%, and they’ll likely decline further in 2024. While interest costs are higher now than two years ago, high interest rates aren’t the largest or most material problem for most companies thanks to strong balance sheets: almost half of the outstanding debt of S&P 500 Index companies ex-financials mature in six-plus years. We believe margins are most vulnerable to a slowdown in revenue growth versus an increase in wages or interest-rate expenses. As a result, we believe earnings growth will be flat to slightly negative during the first half of the year.

In this environment, stock selection will remain key and may present important opportunities in 2024. Look no further than the most recent earnings cycle where the market rewards S&P 500 Index companies with positive earnings surprises (more than the average) and penalized those with negative earnings surprises (more than average).

Canadian corporate earnings may weaken in 2024
Line chart mapping the trailing 12-month earnings-per-share of the T-S-X/S-&-P Index companies against crude prices from December 2004 to data available as of December 6, 2023. The chart shows that there’s a strong positive correlation between the two sets of data.
Source: Macrobond, Manulife Investment Management, as of 12/6/23.
U.S. corporate earnings may be heading lower
Line chart mapping the U.S. Institute for Supply Management’s Manufacturing Index against the trailing 12-month earnings-per-share of S&P 500 Index companies, advanced by six months, from December 2004 to November 2023. The chart shows that there’s a very strong positive correlation between the two sets of data.
Source: Macrobond, Manulife Investment Management, as of 12/6/23. Eps refers to earnings per share.

How are valuations going into 2024?

When we look at valuation, we tend to look at it through the lens of the current levels of the 12-month trailing price/earnings ratio relative to the 20-year history for various indexes. That gives a good gauge of whether they seem overly expensive, fairly valued, or cheap. Given that we expect a weak earnings environment over the near term, it appears that valuation has shrugged that off in North America as it’s relatively in line with long-term averages. While in Europe and the emerging markets, even though valuation looks attractive on an index-level basis, there remains some concern over the economic and geopolitical environment; sometimes, an index is cheap for a reason.

It's important not to take this relative valuation picture simply at face value. For example, the S&P 500 Index looks moderately expensive; however, much of that is driven by the top 10 companies. If you stripped those out, you would be closer to 19 times trailing, which is much more in line with fair value.

When looking at the relative valuation and the underlying risks and opportunities, we believe that this environment is much more conducive to individual security selection rather than investing purely on an index-level basis. It also points out the need to be diversified geographically but doesn’t suggest that one area of the world is poised to materially outperform another.

A snapshot of global stock valuations
Component chart that seeks to provide a snapshot of global stock valuation over different time periods using trailing price-earnings ratios of various widely-used stock price indexes as a proxy. According to the chart, the valuation of U.S. stocks as of December 7, 2023, as represented by the trailing price-earnings ratios of the S&P 500 Index companies and the Russell Midcap Index are more expensive than their peers in Canada, Europe, and emerging-market economies.
Source: Bloomberg, Macrobond, Manulife Investment Management, as of 12/7/23. P/E refers to price to earnings.

What is the outlook for fixed income in 2024?

Coming into 2023, many (us included) thought that the environment was ripe for bonds to reverse course from the negative returns of 2022. For much of the year, that wasn’t the case as the U.S. Federal Reserve (Fed) raised rates to 5.5% and the 10-year U.S. Treasury yield hit 5.0%, its highest level since the financial crisis. We believed the opportunity for bond investors was delayed, not destroyed, and has been a test of patience. The performance in the fourth quarter of 2023 has followed the historical path that shows it’s a good opportunity for bond investors when central banks have stopped raising rates and government bond yields begin to come off their peaks. We don’t believe that is time to abandon bonds in a portfolio.

Have yields in the United States and Canada peaked?

During the summer of 2020, yields set lows of 0.5% and have marched higher in line with central banks raising interest rates. We believe that yields have likely peaked in this tightening cycle in the United States and Canada as central banks are unlikely to be raising rates into a slowdown in 2024.

Historically, yields typically peak in and around when central banks pause raising interest rates. In the last six U.S. interest-rate tightening cycles since the early 1980s, typically, four out of the six, the 10-year peaks roughly 3 months before the last Fed hike. In one instance, they peaked almost simultaneously, while in another, the 10-year peaked roughly 1 month after the last Fed hike. Overall, we believe it’s safe to assume that the 10-year typically peaks a few months around the last Fed hike.

In addition to central bank policy, the 10-year U.S. Treasury yield has been inversely correlated with the direction of U.S. manufacturing. Despite a sluggish manufacturing backdrop, yields haven’t reflected the weak backdrop. Typical leading indicators of manufacturing, including new orders placed by manufacturing, suggest that manufacturing is unlikely to pick up materially in the near term. We believe that the current gap will close, as a result of yields falling versus manufacturing picking up.

For the first 10 months of last year, hawkish central banks, uncomfortable increases in inflation, and resilient economies (and some technical factors related to the supply of U.S. Treasuries) led to an increase in yields. These factors are now reversing and the end of central bank rate hikes will likely push yields lower in 2024.

An inverse relationship: U.S. Treasury yields and U.S. PMI
A simple line chart mapping the U.S. Institute for Supply Management’s Manufacturing Index against the year-over-year change in the 10-year U.S. Treasury yield from December 1993 to data available as of December 6, 2024. The chart suggests that there’s a strong negative correlation between the two sets of data.
Source: Bloomberg, Macrobond, Manulife Investment Management, as of 12/6/23. YoY refers to year over year. P/E refers to price to earnings.ISM refers to Institute for Supply Management. LHS refers to left-hand side. RHS refers to right-hand side.

Is this the year that patience pays off for bond investors?

Last year, we outlined how we believed the bond opportunity would unfold over the course of the next few years, in our article, "The three phases of fixed income investing.” The first phase, “clipping the coupon,” continues to serve investors well, as yields are materially higher than where they were at the beginning of 2022.

Now that we believe peak yields are behind us and that the market is now looking ahead to cuts by the Fed and Bank of Canada, among others, it may be time to transition into phase 2, where “duration is your friend.” Tactically adding duration to bond portfolios can improve the return potential as yields fall.

Calculating future bond returns is very complex as there are many factors at play: yield, duration, convexity, roll, and so on. First, we need to understand that price and yield have an inverse relationship, so when yields fall, bond prices generally rise, and vice versa. The same way that rising yields are a headwind to performance (as in 2022), falling yields can be a tailwind. Second, we need to know that duration is the sensitivity of bond prices to a change in yield. The longer the duration, the more sensitive the bond is to a change in yield. For example, a bond with a duration of five years will increase in price by approximately 5% if the yield drops by 1%.

Investing is probability based. There are no guarantees of future returns, so investors need to weigh the upside and downside risk and understand the probabilities of each. Since we expect yields to fall over the next year, investing in longer duration bonds is starting to look very attractive, especially from a risk/return perspective.

Maybe, it’s time to start moving the phase 2 of our three-phased approach to bond investing, where duration is your friend. It appears that patience is finally paying off for bond investors.

One-year forward return based on change in yields (%)
Bar chart showing how one-year forward returns for U.S. Treasuries of various durations would be affected by changes in policy rates (from a 100 basis point rise to a 100 basis point-fall).The chart shows that one-year forward returns on longer-dated Treasuries are most affected by a changes in interest rates—a rise in rates would hurt returns on long-duration bonds the most and vice versa.

Source: Bloomberg, Manulife Investment Management, as of 11/2/23.

Will the U.S. election have an impact on equity markets?

2024 is set to be one of, if not, the busiest years for elections around the world. According to Bloomberg Economics, voters in countries representing approximately 41% of the world’s population and 42% of its gross domestic product have a chance to elect new leaders this year. Of course, the one that Canadians are mostly focused on is the one in November south of the border.

While it’s far too early to start predicting outcomes (it’s currently a dead heat by the way), we can still look at history to see how the S&P 500 Index fared on average in the 12 months following an election under different combinations of government.

We examined the calendar year returns (including dividends) for the S&P 500 Index going back to World War II.  Since 1945, there has been a clear stock market favourite at the party level. The S&P 500 Total Return Index averaged gains of 14.37% in years where the sitting president was a Democrat, and 10.76% when a Republican was in office. The average for all years 1945 to 2022 was 12.52%. Not surprisingly (or maybe surprisingly for some), the average returns aren’t widely different under different party leadership.

While the next 12 months will be littered with election headlines, from a broad market perspective, it‘s mostly much ado about nothing. If anything, it’ll likely be disruptive rather than destructive. Recent history should also have taught us not to try and predict the market’s reaction to one outcome or the other.

Average S&P 500 Index total returns
Simple bar chart comparing average total returns of the S&P 500 Index under three scenarios: (a) mean of index returns over the years, (b) under a Democratic administration, and (c) under a Republican administration. The chart shows that average total returns are highest under a Democratic administration.

Source: Bloomberg, Manulife Investment Management, as of 12/31/22

Will markets be influenced by potential geopolitical risk?

Skittish investors who have been nervous about potential policy mistakes by the Fed have also been losing sleep over the Middle East conflict that erupted in October, in addition to the ongoing situation in Ukraine. These two events will likely contribute to volatility in the short term.

From a market perspective, if we were to restrict our observations to the performance of key stock indexes during periods of conflict, it’s fair to say that geopolitical events tend to create short-term volatility but seldom leave deep scars over the longer term.

This observation stacks up mathematically: Looking back at the past 24 material geopolitical events, using the S&P 500 Index as a proxy for the broader market, we can see that, on average, the index sold off approximately 5% around the time these events took place, but was able to recover after 40 days. This seems to suggest that the stock markets are typically able to take these events in their stride and that negative sentiment arising from these conflicts aren’t likely to linger. Things, however, might be changing.

In our view, geopolitics now play a much more prominent role in the financial markets. As the world retreats from globalization and embedded within that, with the idea of intertwined economic fortunes, we might need to rethink the lens through which we’ve understood the correlation between geopolitical conflicts and the reaction function of the markets. The growing incidences of these events in recent years might suggest something has shifted. From a purely economic perspective, we’d be remiss not to recognize that these events could depress global growth and price pressures in ways that may not be observable yet.

Snapshot: how geopolitical events have affected the S&P 500 Index
A simple table outlining how key geopolitical events have affected the S&P 500 Index over the years, detailing the extent of total drawdown, the number of days it took for the index to hit bottom and recover. The table shows that the index was most negatively affected by the Pearl Harbour attack of 1941—the index took 307 days to recover and the total drawdown was 19.8%.

Source: Deutsche Bank , As of December 31, 2023

What’s your outlook for the Canadian Dollar? Will the loonie soar again?

From our point of view, although we don’t expect material upside, we don’t see material downside either. We’re likely to see the Canadian dollar remain in a tight trading range over the near term.

Historically, there have been two main drivers over time of the CAD/USD exchange rate: oil prices and the spread between the two-year Canadian government bond yield and the 2-year U.S. Treasury yield. However, we’ve seen these correlations break down over the past few years as more factors have been influencing short-term movements.

Given that we expect the Bank of Canada to cut yields earlier and slightly faster than the Fed, coupled with a potential risk-off rally, there could be near-term weakness for the Canadian dollar. That being said, we expect a migration closer to a fair value in the mid-70s over the course of the year.

Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person.

All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients and prospects should seek professional advice for their particular situation. Neither Manulife Investment Management, nor any of its affiliates or representatives (collectively “Manulife Investment Management”) is providing tax, investment or legal advice.

This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.

Manulife Investment Management shall not assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment approach, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation doesn’t guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.

This material has not been reviewed by, and is not registered with, any securities or other regulatory authority, and may, where appropriate, be distributed by Manulife Investment Management and its subsidiaries and affiliates, which includes the John Hancock Investment Management brand. Copyright 2024 by Manulife Investment Management. Manulife Wealth and/or Manulife Private Wealth are using with permission. The statements and opinions expressed in this article are those of the author. Manulife Securities and/ or Manulife Private Wealth cannot guarantee the accuracy or completeness of any statements or data.

Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.

Kevin Headland, CIM

Kevin Headland, CIM, 

Co-Chief Investment Strategist, Canada

Manulife Investment Management

Read bio
Macan Nia, CFA

Macan Nia, CFA, 

Co-Chief Investment Strategist, Canada

Manulife Investment Management

Read bio