Insights & Resources

North American equities rose in January despite an up and down month. AI-themed US tech shares were buffeted by an unexpected burst of volatility while Canadian stocks navigated a relatively smoother path upwards. Political change was in focus with Justin Trudeau announcing his resignation and Donald Trump entering office with an immediate and wide range of policy initiatives. For Canadian investors the threat of Trump’s trade tariffs loomed large: if, when, and how much. By the end of January, the news was not good. The S&P/TSX Composite Index ended the month up 3.48%, the S&P 500 Index up 2.76%, the Nasdaq Index up 1.66%, the MSCI World Index up 3.46% and the MSCI EAFE Index up 4.82%.  The FTSE Canada Universe Bond Index rose 1.20%.

Monthly market developments

• Statistics Canada reported that inflation in December fell to 1.8% on a year over year basis. The decline from 1.9% recorded in November was due in part to the temporary GST/HST holiday that started on December 14. Restaurant meals and alcohol purchased from stores contributed the most to the decline.
• GDP data released at the end of January revealed the Canadian economy contracted by 0.2% in November. This followed a 0.3% increase in October and was the largest monthly decline since December 2023. Overall, 13 of 20 sectors contracted in November, according to Statistics Canada. Preliminary data for December indicated a gain of 0.2% and will be updated at the end of February.
• Despite flat growth the unemployment rate dipped slightly to 6.7% in December.
• As expected, the Bank of Canada (BoC) cut its policy rate by 25 basis points to 3% on January 29^th. It was the sixth consecutive cut by the BoC and the accompanying commentary focused squarely on the potential economic uncertainty ahead in the face of tariffs. As a result, the BoC also trimmed its GDP growth forecast for 2025 to 1.8%.
• US inflation data for December released in the middle of January showed underlying price pressures continued to slacken, and investors responded with the biggest stock rally since Trump’s election. Broad inflation rose to 2.9% from 2.7% in November according to the US Bureau of Labor Statistics, but the core reading, which strips out volatile food and energy costs, fell to 3.2% in December from 3.3% a month before. Equity markets also applauded strong quarterly earnings reported by major Wall Street banks.
• US growth and employment data showed that the economy remains solid. GDP grew 2.5% in 2024, according to the US Commerce Department, less than 3.2% posted in 2023 but still a respectable pace. Q4 came in at an annualized rate of 2.3%, adjusted for seasonality and inflation, down from 3.1% in Q3. But consumer spending, a major driver of the economy, was robust in Q4.
• Employment data continued to underline the gap between the Canadian and US economies, with the December US unemployment rate dropping by 0.1% to 4.1%. Wage growth continued to slow, further easing a key source of inflationary pressure.
• Given this broadly positive picture, investors were not surprised when the Federal Reserve left its policy rate unchanged at 4.25% – 4.5% at the end of January. The pause followed four consecutive cuts in 2024 that totaled a 100 basis points. Chair Jay Powell noted the Fed does not “need to be in a hurry to adjust our policy stance” with steady economic growth and a healthy labour market.
• Volatility made an unexpected appearance late in the month after a Chinese AI firm, DeepSeek, unveiled a powerful free AI assistant that it said cost far less to build than the dominant US models. US tech shares immediately slumped, with the Nasdaq index tumbling 3.1% on January 27^th and AI chip makers Nvidia and Broadcom both plummeting more than 17% on the day. While shares in both companies lost ground for the month the Nasdaq managed to finish with a gain.
• In Europe, The European Central Bank (ECB) reduced its key interest rate to 2.75% from 3% the same week as the BoC and Fed rate decisions. The ECB has now cut five times for a total of 125 basis points since June 2024 and held to its view that inflation is on track to reach its target. It also signaled more rate cuts are likely.
• Driving the ECB perspective is the fact that the European economy remains in fragile condition, with Q4 eurozone growth of essentially zero and just 0.7% for all of 2024.
• UK monthly real GDP growth for November grew 0.1%, month over month, after shrinking 0.1% in October. Preliminary data for December indicated no expansion. UK inflation fell in December to 2.5% from 2.6% in November.
• European stocks, as represented by the Stoxx Europe index, outperformed other major global equity indices in January, rising 6.3% for the month to a record high. London’s FTSE 100 also closed at a record level, rising 6.1% for the month.
• China posted Q4 GDP growth of 5.4%, year over year, beating expectations and helping it achieve its 2024 growth target of 5%. December data indicated strong industrial production growth of 6.2%, year over year. Retail sales also exceeded expectations, but the property sector remained weak, with prices continuing to fall.
• The Bank of Japan raised its policy rate by 25 basis points to 0.5%, its highest level in 17 years, as wage growth picked up amidst some signs of labour shortages.

How does this affect my investments?

The topic of tariffs will stay in the headlines in February and markets on both sides of the border will be attuned to every announcement for specific implications. A key question is whether Trump will use them as a targeted negotiating tactic or as part of a broader strategy to fundamentally reorder the global economy, with potentially uncertain outcomes. Investment markets dislike uncertainty and would not welcome economic disruptions or a resurgence of inflationary pressures. However, US equity markets would cheer other Trump policy initiatives such as tax cuts, which he has said is a key legislative priority. In Canada, tariffs, federal politics, and the pressing need for better growth are all priorities with economic consequences. In this changeable environment portfolio diversification matching your personal risk tolerance and time horizon are more important than ever and we are here to help you maintain that.

Disclaimers

The information in this letter is derived from various sources, including Financial Times, CBC, Statistics Canada, MSN, Bank of Canada, BNNBloomberg, Wall Street Journal, and The U.S. Bureau of Labor Statistics 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.