Insights & Resources

A year ago, outlooks for US and Canadian equities were cautiously optimistic after a strong 2023, particularly in the US. Caution was indeed needed on several occasions in 2024, but the broad sweep proved to be steadily upwards as major stock indices frequently set new highs on the way to a very good year.

Equities and bonds

Expectations for declining inflation and lower interest rates were fulfilled in 2024 and helped power a resilient US economy. These welcome developments and dramatic gains in AI infused big tech shares all helped drive back-to-back double-digit gains in 2023 and 2024 for US equities, the best consecutive years since 1997 and 1998. In Canada, the S&P/TSX Composite Index posted its best year since 2021 and more than doubled its 2023 return.

Equities climbed briskly in Q1 on sentiment that aggressive central bank campaigns to tame inflation would succeed in 2024, leading to lower interest rates that could help relieve any recessionary pressures. In the US, enthusiasm for the large cap, AI related tech stocks that ignited markets in 2023 remained strong, but market breadth increased, with financials, energy and industrials also contributing. In Canada, the largest contribution to the TSX/S&P Composite Index in Q1 came from its smallest component, heath care. Close behind was the much bigger energy sector, which benefited as oil prices hit their highest levels since October, 2023. European and Japanese shares also advanced in the period.

US and global stocks closed higher in Q2 despite a brief downward turn in April, but the Canadian market dipped slightly. In the US, big tech led again while in Canada, health care, the best sector in Q1, detracted, but materials and consumer staples added value. Markets continued to be highly attuned to the prospect of rate cuts and in early June the Bank of Canada (BoC) made the long-awaited pivot, helping Canadian stocks regain forward momentum. The European Central Bank (ECB) trimmed rates a day after the BoC but the US Fed held off at its June meeting due to a strong US labour market and sticky inflation.

Stocks closed higher yet again in a bumpy third quarter as the impact of slowing inflation and rate cuts by a growing number of central banks globally helped overcome bursts of volatility. In August, a sudden selloff in Japan sent the Nikkei 225 equity index down 12% in its worst day since 1987. Major stock indices fell globally and volatility indices shot up. The pullback was triggered in part by the unwinding of the yen carry trade, which is when investors borrow in a cheap currency, often the yen, to reinvest in a higher-yielding one, usually the US dollar. As the yen rose sharply in the summer, many carry trade investors were caught unprepared, leading to forced selling. Fortunately, the storm passed quickly, and markets stabilized.

Canada was a standout in Q3 as the S&P/TSX Composite Index soared nearly 10%, with all Index sector components in positive territory. In the US, the S&P 500 Index gained on interest-sensitive sectors, including utilities and real estate, but the big news was a larger than expected 0.5% rate cut by the Federal Reserve in September, its first drop in four years.

The multi-year decline in Chinese equities was dramatically reversed at the end of Q3 when a series of major economic stimulus announcements sent stocks flying, with one day gains of 10.9% on the Shenzen Composite Index and 8% on the Shanghai Composite Index.  Globally, stocks shook off the August slump, with the MSCI World Index closing Q3 at a new high.

The final quarter was a roller coaster. The Fed trimmed for a second time on November 7^th by 25 basis points but that was overshadowed by the US election two days earlier. Enthusiasm for Donald Trump’s victory triggered major inflows into US equites in November that boosted markets to fresh highs. The Fed sliced off another quarter point in December (bringing the total reductions in 2024 to 100 basis points) but US equities retreated in the final weeks of the year after Fed chair Jay Powell signaled the pace of further cuts in 2025 may be significantly slower than markets were anticipating. Despite the December slump US and Canadian equities notched strong gains in 2024. The S&P/TSX Index ended the year up 21.65%, the S&P 500 Index rose 36.36%, the Nasdaq was up 41.33%, the MSCI World Index up 29.43% and the MSCI EAFE Index up 13.24%.

There was also some volatility in an otherwise positive year in bond markets. Yields, which move in the opposite direction to bond prices, rose in Q1. Inflation was trending down, but proving sticky in the U.S., with an unexpected jump in March. Yields initially continued to rise in Q2, with that of the closely watched US 10-year government bond peaking at the end of April. But from that level Canadian and US 10-year government yields then slid by more than 100 basis points by mid-September, as inflation data steadily declined and central banks began cutting interest rates. The US 10-year yield touched 3.6% in September as the Fed made its first rate cut.

But the market then turned, sending yields up again as bond prices slipped on higher US inflation data in October and November. Further upward pressure on yields came in December following Fed chair Powell’s comments about fresh questions around inflation due both to future policy uncertainty (with the Trump administration about to take office) and the unexpected data uptick. By late December the yield on the US 10-year note yield was back to levels similar to the end of April. For the year, the FTSE Canada Universe Bond Index rose 4.23%.

Economic indicators

Quarterly US GDP growth began 2024 on a subdued note, coming in at 1.4% for Q1 and below expectations. Growth was stronger in Q2 and Q3, at 3.0% and 3.1%, respectively, and supported the view that a resilient economy and declining inflation were piloting the US to a soft landing, even in the face of high interest rates. This outlook was further bolstered by corporate profits that continued to trend upwards in 2024.

The US consumer helped that growth. After ending 2023 strongly, broad consumer activity started 2024 slowly but bounced back in February and March, beating market expectations. Data for Q2 was softer but accelerated again in Q3 and remained steady in October and November, with retail sales charting a similarly positive path. A robust U.S. job market was another positive factor. From a very low level in January (3.7%) the unemployment rate drifted up but stayed below 4% until June. By November it was 4.2%, still a very benign level by historical standards.

The economic picture was very different in Canada, with GDP growth muted to flat, barely moving from 0.3%-0.5% between Q1 and Q3. Corporate profits changed little in Q1 from Q4 2023, nudged up in Q2 but then fell back in Q3 to levels slightly below the same period a year earlier. Unemployment data reflected this slackness, rising from 5.7% in January to 6.8% in November.  Retail sales trended slightly downward throughout the first half of 2024 before picking up in September.

A significant development in the year was the ongoing slide in the loonie against the US dollar, a trend in place since 2021. After declining through the year the Canadian dollar starting regaining ground in late summer, reaching .74 cents (USD) by late September, but a rising US currency pushed it down sharply in Q4 to .69 cents (USD) by year end, a level not seen in more than 20 years.

Inflation and interest rates

Inflation and interest rates, two major themes worldwide at the start of 2024, both moderated significantly during the year as more and more central banks pivoted to rate cuts. The downward trend in both, initially in inflation and later in rates, gave critical support to markets. A notable difference between Canada and the US was that the BoC started cutting rates three months sooner than the US Fed, largely due to lower inflation readings and softer growth.

US inflation fell from December 2023 (3.4%, year over year) to 3.1% in January and changed little in February. But a spike in March to 3.5% sent equities south as the slowing inflation narrative was called into question. However, the data then fell every month from April to September, when it hit 2.4%. The remainder of the year saw a slight rise to 2.7% by November. This clear trend allowed the Fed to finally act in September and it delivered a 50-basis point cut, easing monetary policy for the first time in four years. The two subsequent reductions of a quarter point each lowered its policy rate target range to 4.25%-4.5%, a level last seen in December 2022.

What can we expect next?
As we embark on a new year, the divergence between the Canadian and US growth rates is clear. Our economy struggled in 2024 despite the BoC lowering its key overnight lending rate five times in 2024, from 5% to 3.25%. The benefits of lower inflation and rates will continue to work through the economy in 2025. If growth remains tepid and inflation benign, interest rates will fall further in 2025, helping individuals, companies and the overall economy. Exporters will gain from a lower dollar, but imports will be more expensive.

The US economy is in much better shape and Donald Trump has said he favours policies supportive of even higher growth rates. Strong US economic expansion is typically a plus for our economy, but Trump has also said he will implement broad tariffs on many US trading partners, including Canada. The details are unknown, for now, and could range from trade negotiating tactics to actual policies that could negatively impact multiple sectors. This will be a key issue for Canadian investors in 2025.

Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term goals. This strategy helps you keep your emotions out of investing, typically buying high and selling low like many investors do. Ongoing monitoring and reviewing of your portfolio also ensure it remains on track. Diversifying investments reduces risk as well.

2024 RRSP deadline and 2025 TFSA room

March 3, 2025 is the deadline for your 2024 RRSP contributions. Confirm your total available room well before then and we can review your asset allocation targets. The 2025 TFSA contribution limit is $7000. Both RRSPs and TFSAs can hold most types of investments and offer compelling tax efficiency.

As we step into 2025, the Canadian economy faces unique challenges, including muted growth and a weaker loonie. However, opportunities exist for investors to leverage lower interest rates and benefit from diversification across sectors and geographies. Meanwhile, the U.S. economy remains resilient, driven by robust growth and strong equity performance, but uncertainties around President Trump’s trade policies loom large.

We Can Help

For Canadians, staying disciplined, reviewing portfolios, and prioritizing tax-advantaged accounts like RRSPs and TFSAs can be vital steps toward achieving long-term financial goals. The March 3, 2025, RRSP deadline and the $7,000 TFSA contribution limit provide a timely opportunity to bolster tax-efficient savings.

The lessons of 2024 remind us of the value of a measured investment approach, balancing optimism with caution to navigate an evolving economic landscape.

We’re happy to meet with you and ensure you’re prepared for any upcoming changes. We work with business professionals, executives, and families to grow and protect their wealth using our Wealth Plan formula. To discuss our approach and if it is the right fit for you, we invite you to schedule a no-obligation discovery consultation.

Disclaimers

All index performance is in Canadian dollars.

The information in this letter is derived from various sources, including Wall Street Journal, JPMorgan Asset Management, NBC, Bureau of Economic Analysis, Bureau of Labor Statistics, Reuters, Trading Economics, Statista, Statistics Canada, Financial Times, Factset, Toronto Star, BNNBloomberg, and The Globe and Mail as at various dates. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources and reasonable steps have been taken to ensure their accuracy. Market conditions may change which may impact the information contained in this document. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances. Certain statements contained in this communication are based in whole or in part on information provided by third parties and CI Global Asset Management has taken reasonable steps to ensure their accuracy. Market conditions may change which may impact the information contained in this document.