Financial Letter - December 2023

To describe economic conditions and stock markets as unpredictable would be an understatement. Whereas economists and market strategists projected a recession in 2023, the US economy actually expanded by an astonishing 4.9% in the third quarter and 2.9% in the fourth quarter—a reminder that certain strategists' predictions need to be taken with a grain of salt. A case in point is the doomsday scenario described by François Trahan on the Le monde à l'envers program. The stock market can react in unexpected ways to the various economic indicators. For example, against a backdrop of high inflation, the market showed very little enthusiasm for the strong job gains over the summer. Being a financial guru can be risky business. High-profile investors like Charlie Munger and Warren Buffett have taught us that it's possible to build some of the largest personal fortunes in the world by taking advantage of stock market fluctuations.1

Sharp stock market corrections in September and October were followed by a positive turnaround in November, when the S&P 500 rose 8.9%, the biggest monthly increase since July 2020. The upswing has carried over into December. We're taking advantage of these favourable conditions to take profits and sell securities that are most sensitive to the current economic climate. Going into the new year, we'll be overweighting bonds and cash and slightly underweighting equities.

The S&P 500 is currently trading at 20x the profits forecast for 2024. Stock prices are higher than the 16.8x historical average. However, if you include the most expensive stocks on the S&P 500, specifically technology stocks, the rest are trading at much more attractive levels. Most analysts have a target of 5,000-5100 for the S&P 500 in 2024, for a return of 10-12%. While analysts were too negative in their outlook for 2023, they may be a little too optimistic for 2024, with corporate earnings projected to rise 11%.

Looking back, we would have expected more economic disruptions following the rapid interest rate hikes. The banking industry felt this more strongly than other sectors. Three US regional banks were wiped off the map. In Europe, UBS took over Credit Suisse. Canadian banks slid 30% from their February 2022 peak but have seen a 10% gain since November. Commercial real estate is facing risks given the high vacancy rate in office buildings in large cities. Mortgage and commercial loan renewals will put pressure on consumers and businesses. We need to keep in mind that it can take up to 2 years for the full impact of interest rate hikes to be felt in the economy. Canada's economy is more vulnerable to interest rate hikes than the US. One reason is that Canadian consumers are carrying much higher debt loads, and the other is that mortgage terms come up for renewal at market rates more quickly. These differences impact the performance of the respective stock markets, with the US market outperforming the Canadian market.

The Brossard Group at Desjardins Securities is taking concrete action to meet your financial goals. We're putting Desjardins's resources to work for our clients by joining forces with experts in taxation, law, business transfers, insurance, and individual and business financing. Our collaboration with you begins with the elaboration of a financial plan for each member of your family. If you have specific needs, we can focus on optimizing your family wealth.

Of course, not everyone is fortunate enough to enjoy a financial situation like Charlie Munger did. Keep in mind, however, that at age 30 he was flat broke. With the help of his business partner Warren Buffett, he was able to amass one of the largest personal fortunes in the world by taking advantage of stock market fluctuations. According to Munger, "Smart investing is a question of behaviour. It can happen that stock markets around the world fall. You can't do anything about it. Why panic? Humans aren't very good at handling pain," he said. "And so we reach for the jar of Aspirin. But this harms our investment returns and makes us poorer in the long run. The sooner you realize this, the sooner you can leave your investments to work in peace—irrespective of how the market is doing." In other words. Munger believed that reacting to market fluctuations will make you poorer in the long run.

He added: "People have always wanted someone to predict the future for them. A long time ago, kings used to hire people to read sheep entrails. Listening to forecasters today is just as crazy as when the king used to hire a man to read sheep entrails."

Thank you for choosing Desjardins. The whole team wishes you and your loved ones happy holidays.

Please feel free to reach out with any questions or concerns.

Sincerely,

Isabelle, Chantal, Xavier, Thomas, Sébastien and Jean-François

  1. Charlie Munger, 1924–2023.Return to footnote 1 referrer

Each Desjardins Securities advisor named on the front page of this document, or at the beginning of any subsection hereof, hereby certifies that the recommendations and opinions expressed herein accurately reflect such advisor’s personal views about the company and securities that are the subject of this publication and all other companies and securities mentioned in this publication that are covered by such advisor. Desjardins Securities may have previously published other opinions, including ones contrary to those expressed herein. Such opinions reflect the different points of view, assumptions and analysis methods of the advisors who authored them. Before making an investment decision on the basis of any recommendation made in this document, the recipient should consider whether such recommendation is appropriate, given the recipient’s particular investment needs, objectives and financial circumstances.

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