2023 Capital Markets Review
By James Parkyn & François Doyon La Rochelle
2023 was marked by positive returns in all asset classes with the help of a massive rally near year-end. Despite the outbreak of the war in the Middle East, the hope of an imminent reduction in central bank rates – amid receding global inflation pressure – led stocks and bonds to appreciate substantially, with double-digit returns in several asset classes.
Inflation rates were cut by half in Canada (from 6.3% to 3.1%), the US (from 6.5% to 3.1%), and the UK (from 11.6% to 5.3%). Inflation also declined substantially in the European Union, Japan, China, and South Korea.
On the interest rate front, the Bank of Canada and the US Federal Reserve maintained their restrictive monetary policy, increasing their benchmark interest rates from 4.25% to 5% and from 4.50% to 5.50%, respectively. Ten-year government bond yields declined in Canada from 3.3% to 3.1% and were stable in the US at 3.9%.
Nine of the eleven sectors of the global stock market produced positive returns in 2023,[i] the top performers being information technology (47%), communication services (34%), and consumer discretionary (26%). Poland (48%), Greece (47%), and Mexico (38%) were the top‑performing country markets.
Here are our observations on asset-class returns in 2023:
Short-term and total market Canadian bond indices produced returns of 5% and 6.7%, respectively.
Short-term and total market global bonds (hedged to the Canadian dollar) delivered 4.7% and 6.3% returns, respectively.
Canadian stocks delivered a return of 11.8%.
US stocks returned 23.3% in Canadian dollars and 26% in US dollars.
International developed market stocks returned 15.7% in Canadian dollars and 16.1% in local currencies.
Emerging market stocks returned 7.9% in Canadian dollars.
The Canadian dollar has appreciated relative to the major currencies. This explains the mildly lower CAD returns on US and international stocks compared to local currency returns.
Large-cap stocks outperformed small-cap stocks in all developed markets and underperformed in emerging markets.
Growth stocks massively outperformed value in the US, while the reverse occurred in emerging markets. Value and growth stocks had similar returns in Canada and international developed markets.
Looking forward to 2024, investors will continue to face uncertainty. With an upcoming US election and geopolitical tensions in Europe, Asia, and the Middle East, it could be tempting to question our investment strategy. However, investors should remember that since the turn of the millennium, the global stock market has had positive returns in 16 of the last 24 years. Over this period, despite four bear markets, investors who stayed the course were rewarded. We remain convinced that the wisest course of action is to have a sound investment plan that you can stick with in good times and bad. We will invest with discipline for each client, with an appropriate mix of stocks and bonds. Portfolios will remain extremely diversified globally, and we will avoid the false promises of active management and investment fads. Finally, as always, we will optimize portfolio costs and taxes.
[i] All returns are calculated in Canadian dollars unless otherwise mentioned. Data source: DFA Web.
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