After a tough year for the economy and investing in 2022, few people expected any improvement in 2023. And yet many indicators have improved in recent months. An overview. 

Inflation is down… 

After reaching a peak of 8.1% in June 2022, inflation as measured by the increase in the Consumer Price Index (CPI) started a decline that reached 3.1% last November. Keep in mind that the Bank of Canada’s target range is between 2% and 3%. 

You don’t notice the decrease when you go to the grocery store? A drop in inflation mustn’t be confused with a drop in prices: the cost of a grocery basket continues to rise, just less rapidly than before (4.7% on an annual basis last November compared to 11.4% in January 2023). 

... but interest rates aren't dropping

While inflation is down, the Bank of Canada’s key interest rate, which dictates the interest rates on loans in general, has merely stabilized. Last December, the Bank of Canada held it steady at 5.0% for the third time in 2023, but did not announce any reduction in the foreseeable future. 

The stock market did better… 

On December 29, 2023, the U.S. stock market's S&P 500 Index ended the year with an annual return of about 24%, which means that the market has recouped most of its losses from 2022. 

Canada’s S&P/TSX Index also posted a positive return, although it didn’t match the performance of its U.S. counterpart. On December 29, it posted annual growth of over 8%. 

… and the bond market picked up 

As for the bond market, which gave investors a nasty surprise in 2022, it, too, ended the year in positive territory. As an example, the S&P Canada All Bond Index was up by about 6.3% for the year as of December 29, 2023. 

A world of perceptions… 

Is this portrait rosier than you were thinking? If so, you are not alone. A number of studies show that people have a tendency to see the economic situation as worse than it really is, especially after a tough period. For example, participants in a Bank of Canada survey early last fall had a perception of inflation that was much higher than the actual inflation rate, and predicted that it would increase even further in the next 12 months, despite the fact that it’s showing a clear downtrend. In the United States, a survey by the Guardian showed that, last fall, a majority of Americans believed that unemployment was at its highest in 50 years, when it has rarely been lower, and that the economy was in a recession, when it had continued to grow. 

…and emotions 

In the world of investment, in particular, this type of bias is well documented by “behavioural finance,” as we can read in this article published last year. These types of bias mean that investors might base their decisions on feelings instead of facts, which ultimately translates into a “cycle of investor emotions,” going from optimism to complacency (in rising markets) to anxiety and despair (when markets are falling), then back to hope and optimism… before heading back to complacency. 

Of course, not all economic perceptions are false. For instance, if you have the impression that access to home ownership remains problematic, the facts will bear this out. A report by Ratesdotca last October compared the average price of a house in various large Canadian cities with the average household income of the people living there. In every city except Edmonton, house prices were much higher than the average household could afford. Here, the perception is in sync with reality. 

Stay the course  

That said, it’s only natural to be influenced by one’s perceptions, especially after the roller-coaster ride we’ve been on since the COVID-19 pandemic. However, the performance of the stock and bond markets in 2023 offers more evidence of the importance for investors to maintain a long-term view, count on a diversified portfolio and not let emotions take over. To learn more about the concept of diversification, take a look at this infographic. 

Indeed, investors who stayed in the market by investing their portfolios in proportions consistent with their risk tolerance were able to profit from last year’s rebound, whereas if they had “gotten out,” they would have realized their losses and deprived themselves of an appreciable return opportunity.      

It’s true that certain more predictable investments, such as guaranteed investment certificates (GICs), are currently delivering the kind of returns we haven’t seen in a long time. Keep in mind, however, that historically this asset class has not offered the best long-term performance: it is outperformed by bonds and, in particular, by stocks. If you believe that guaranteed returns might help you sleep at night, it could be a worthwhile idea to determine beforehand if these products have a place in your long-term financial plan. 

Incidentally, the start of a new year is always a good time to talk to your advisor, take stock, compare your perceptions with reality and update your game plan. Don’t hesitate to contact him or her!