As of writing, 2023 has been a strong year for risk assets. S&P 500 is up +22% year-to-date, while MSCI World is up +20%. Bonds have also clocked in a positive year of returns. The equity funds we manage at Dominion in-house, our Global Trends strategies, have performed even better than equity market indexes, with our Managed Fund up +24% and Ecommerce Fund +28% in 2023.
This is very strong performance, especially given how negative most investors were in late 2022. Most commentators were predicting another tough year for equities in 2023, a recession in the US, and further volatility in markets. What we’ve actually had was a great year for risk assets, led by investments in structural growth (at reasonable price) active strategies like the Global Trends Funds.
With 2024 around the corner, we thought we’d share our view on the year ahead for stocks. In short, we’re bullish. And there are three big reasons why we are bullish:
The economy is strong: the economic data, particularly from the US has consistently surprised to the upside in 2023. US real GDP growth was more than +5% in Q3 2023, that is the kind of growth rate you expect from an emerging market like China, not a developed world economy like the US. We expect US growth to continue to surprise to the upside. There does not appear to be a recession coming. Meanwhile while European growth has been lower, inflation has also remained stubbornly higher in Europe. There is no deflationary recession in Europe though, just high inflation masking high nominal growth. As inflation in Europe trends down, we should see better real economic growth numbers come through in 2024. China has remained a weak spot for growth, room for a surprise to the upside in 2024 in our view.
Inflation is coming down: the bear market in risk assets of 2022 was primarily driven by a big rise in inflation, which precipitated a rise in interest rates. High and rising inflation and rates is bad for stocks and bad for bonds, prices go down. The opposite is also true. Lower and declining inflation and falling rates is good for stocks. Inflation in the US has fallen dramatically, closer to 3% now, while it is also falling quickly in Europe. There is already talk of rate cuts in 2024. This is good for the outlook for stocks in 2024.
A new productivity boom may just be starting: The post-2008 developed world economies have been plagued by low and falling rates of growth in economic productivity. Previous periods of ‘boom times’ in the economy (1920s, 1950s-1960s, 1980s-1990s) were periods of rising productivity growth. Periods remembered for stagnation and a tough economy (1930s, 1970s, 2010s) were periods of declining productivity growth. These bouts of rising and then falling productivity growth are cyclical. Typically, a period of prolonged declines in productivity growth (economic stagnation) are followed by a period of rising productivity growth (economic boom).
The 2008-2022 period was a prolonged period of falling economic productivity growth, with low economic growth and rates of innovation in economics like Europe and the US. The productivity growth rates in the US economy have just started picking up! What is more, we have several major technologies like AI, cloud computing, genetic medicine, which are likely to drive a new productivity boom. Productivity booms are good times to own stocks, we’re overdue one, and it looks like we’ve already started inflecting up!
We think it is no coincidence that our Global Trends Funds, which focus on investing in companies who innovate and drive productivity improvements, have performed so well in 2023. The market discounts the future, and we think the market is waking up to the coming productivity boom. In the past these booms have lasted 10-20 years. Even if we’re on the low end of that range, the next 10 years could see a major bull market in innovation companies, the stocks we invest in. If we’re right on the productivity boom, buckle up for the bull market of the century!
This will be the last weekly news from us before the Christmas and New Years break. We will be back in early January.
Merry Christmas and Happy New Year, from the investment team at Dominion!
Disclaimer: The views expressed in this article are those of the author at the date of publication and not necessarily those of Dominion Capital Strategies Limited or its related companies. The content of this article is not intended as investment advice and will not be updated after publication. Images, video, quotations from literature and any such material which may be subject to copyright is reproduced in whole or in part in this article on the basis of Fair use as applied to news reporting and journalistic comment on events.
