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Some experts predict a winning year for the markets but what if they are wrong?DKosig/iStockPhoto / Getty Images

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Some experts are predicting everything to go right in the markets in 2024 – falling interest rates, tamed inflation, a soft landing for the economy, strong corporate earnings, no recession, muted global conflicts, an uneventful U.S. election, and the staying power of technology stocks. But what if it all goes wrong?

Denis Taillefer, a senior portfolio manager at Caldwell Investment Management Ltd. in Toronto, says when you look at how market watchers are setting up for this year, they “seem to be pricing in, I don’t want to say a perfect scenario, but an optimal outcome.”

That puts investors in a tough spot, adds Candice Bangsund, vice president and portfolio manager of global asset allocation and private markets solutions at Fiera Capital Corp. in Montreal.

“With so much good news priced into the market, it actually leaves investors pretty vulnerable to any sort of evolution of the data that go against these extremely optimistic expectations,” and that could lead to “a lot of volatility in the next few quarters,” she says.

She says investors should take a defensive stance in their portfolios this year with equities and bonds, particularly after the runup last year, and potentially look at private market investment strategies such as private credit and real assets, including real estate, infrastructure and agriculture.

Craig Ellis, vice president and portfolio manager at Bellwether Investment Management in Oakville, Ont., says markets are “priced to perfection, so all of these things have to come true for us to have another really strong year.”

The inflation conundrum

Top of mind of what could go wrong this year is inflation. It could stay higher for longer and then interest rates won’t fall as much as predicted, Ms. Bangsund says.

While the U.S. Federal Reserve Board and the Bank of Canada have suggested rates won’t go any higher – with Canada at 5 per cent and the U.S. at 5.5 per cent – at the start of the year, the market was pricing in rate cuts of 150 basis points, or six rate cuts of 25 basis points, to cut the rate to 3.5 per cent in Canada.

“We don’t see that coming to fruition,” Ms. Bangsund says. “The market needs to adjust.” Recently, the market did just that after U.S. retail sales came in stronger than expected and several Fed speakers tamed rate-cut expectations – the market was at 80 per cent odds of a rate cut in March and then it dropped to 50 per cent, she explains.

That data caused investors to reconsider their views, she says, thinking that “maybe we went a little too far too fast on this bet for a flurry of rate cuts in 2024.”

Rate cut predictions for 2024 are far too optimistic, Mr. Ellis adds. “We don’t think rates are going to come down as soon and nearly as much as the market is hoping for right now.” If central banks don’t cut rates as expected, “certainly, we could see some sort of correction in the markets.”

The main factor for that view is that inflation is still much higher in the U.S. and Canada than the 2 per cent target and, while it has been falling gradually, “it’s getting a little stickier so [the inflation rate] is not coming down as quickly now as people had hoped,” Mr. Ellis explains.

In addition, central banks may be wary of cutting rates too quickly, reigniting inflation and fuelling an already resilient and strong economy in the U.S., he adds.

What’s good for the markets?

Markets are also expecting strong corporate earnings for 2024, Mr. Taillefer says, but if the economy is softer, then earnings won’t match expectations. “And that would be negative for the market.”

On the other hand, if corporate earnings are stronger than expected, “which is usually good for the market,” Mr. Taillefer explains, that would also result in the central bank keeping interest rates “higher for longer, maybe even a change in sentiment where [the central banks] could raise rates again, and that would be negative for the market multiples.”

The risk of a recession is another factor to watch for this year, he adds. “Last year, markets were expecting a recession. This year, they seem to have moved to [expecting] more of a soft landing.”

However, “we still think there’s a decent probability that we could see a recession,” Mr. Taillefer stresses. “Right now, the data seem to say we will be able to skirt that, but we can easily tip into recession. If that were the case, we think we would see a pretty significant correction in the market.”

How the economy does, and whether there are rate cuts, could also hit the “magnificent seven” tech stocks on the S&P 500 – Alphabet Inc. GOOGL-Q, Inc. AMZN-Q, Apple Inc. AAPL-Q, Meta Platforms Inc. META-Q, Microsoft Corp. MSFT-Q, Nvidia Corp. NVDA-Q and Tesla Inc. TSLA-Q – that rallied strongly last year and were a key driver of the market gains in the U.S., Mr. Ellis says.

“They will be vulnerable,” he says. “If the interest rate outlook changes and bond yields go up a little bit that could spell trouble for the technology sector.”

“We don’t think they can repeat what they did last year,” Mr. Taillefer adds.

One issue Caldwell is keeping an eye on is the global geopolitical risks, particularly if the conflict between Israel and Hamas broadens across the Middle East.

“That can have a significant impact on the global supply chain and the price of oil,” Mr. Taillefer explains, which won’t help inflation and could hinder the economy.

Then, there’s the U.S. election, which could spawn more uncertainty with November’s contest currently looking like it will be a rematch between President Joe Biden and former president Donald Trump.

“It’s just the uncertainty associated with the outcome,” Ms. Bangsund says. “That creates some volatility [amid] the headlines and noise around the potential for sharp policy reversals in 2025.”

While every year there are potential challenges to the forecasts, this year that’s “heightened,” Mr. Ellis says.

“There’s a fair amount of complacency right now that everything is going to go smoothly, that the economy’s going to have a soft landing, rates are going to come down and everybody lives happily ever after,” he explains. “Hopefully, that’s what happens, but there are a lot of wildcards out there.”

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