Middlefield Market Commentary
Macro Update
by Dean Orrico, President & CEO?and Rob Lauzon, Managing Director & CIO
Equity markets started the year the same way they finished 2023. The S&P 500 returned 1.7% in January and reached all-time highs during the month. The rally marks the third best three-month return in the past fifteen years, only trailing the rebounds from pandemic lows in 2020 and GFC lows in 2009. It registers in the 99th percentile of market history and is one of the most powerful short-cycle rallies not to come out of a recession.
Unlike the previous two months, the market’s strength in January was not fueled by falling interest rates. Recent data confirms a resilient labour market and robust consumer spending in the U.S., highlighted by real personal spending expanding by 0.5% in December. The economic outlook in Canada is also much brighter than many had feared. The economy grew by 0.2% in November and is now projected to increase 1.2% on an annualized basis in the fourth quarter. Economic strength is being reflected in earnings growth, with 70% of S&P 500 constituents that have reported thus far topping Q4 earnings estimates by 6.2% in aggregate. We expect stable business conditions to support continued momentum in earnings as companies report throughout February.
The improving economic outlook has hawkish implications on monetary policy. Fortunately, inflationary pressures continue to ease as evidenced by core PCE inflation Index slowing to 2.9%. Although Fed Chair Jerome Powell quelled hopes for a March rate cut at his most recent press conference, we expect persistent disinflation to support an easing in monetary policy throughout the year. While investors have obsessed over the exact timing and magnitude of Fed cuts, we believe the direction and trend of monetary policy is more important. With inflation falling and real rates moving higher as a result, nominal rates have become increasingly restrictive. Although we can’t predict with certainty when the first cuts will come, we maintain our conviction that policy will ease this year, providing a constructive backdrop for equities.
2024 is an election year, not just in the United States, but in more than 60 countries representing nearly half the world’s population. In fact, more voters will head to the polls this year than ever before in history. While it is difficult to predict the outcomes or impacts that elections will have on society, history shows that election years tend to produce positive returns in the market. Focusing on the U.S., there have been 23 elections since the S&P 500 Index began. In these election years, 83% have provided positive performance with an average return of 11.3%. In years with a Democratic incumbent, the total return averaged 12.9% when a Republican was elected and 11% when a Democrat took the White House. Obviously, every election has its own unique dynamics and historical context to consider. Our point is that “election risk” should not be at the top of investors concerns in 2024 considering the market’s proven ability to generate attractive returns when these conditions have been present.
Solid economic data combined with falling inflation provides an ideal investment backdrop for equity income. The Goldilocks scenario that has taken shape in recent months should support the S&P 500 trading comfortably above 5,000 by the end of the year. The path to getting there will likely not be linear, however, and we are becoming increasingly focused on valuations and investor positioning. Middlefield’s core strategies, which are grounded in dividend-paying companies, are well-positioned against the current market backdrop.
About Middlefield:
Founded in 1979, Middlefield is a specialist and independent equity income manager headquartered in Toronto, Canada. Middlefield’s actively managed, award-winning funds are designed to be “investments that work for you” by distributing consistent and high levels of income through various market cycles. Middlefield’s funds span a number of market sectors including real estate, healthcare, innovation, sustainability, infrastructure and energy. Investors can access these strategies in a variety of product types including ETFs, Mutual Funds, Closed-End Funds, Split-Share Funds and Flow-through LPs. To learn more, visit www.middlefield.com.
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