Investment Commentary January 2025

Welcome to 2025 – a year that we expect will be very interesting economically, geopolitically and from a market perspective.

What happened in 2024?

Both Canadian and U.S. equity markets were strong in 2024, up 21.7% and 25.0%, respectively. The Magnificent 7 stocks and AI enthusiasm continued to carry the U.S. market, while the TSX performance was broader-based, with technology, financials, energy, and materials all gaining over 20%. The Bank of Canada decreased interest rates throughout the year in response to a weakening economy and a reduction in the inflation rate. This helped to support the economy and provided a tailwind to the market. The U.S. economy was remarkably strong and experienced only a slight decline in growth. The persistent inflation stopped the central bank from decreasing rates after the first initial rate cut. The U.S. economy continues to be in good shape, and it appears that the Canadian bank rate cuts have helped, from early indicators, to bring some growth back to the Canadian economy.

What is going to happen this year?

With the new political environment, it is very difficult to project how this year will end. Our macro view is we expect that Canadian interest rates are likely to continue declining to the 2.25% level by mid-2025, amid a still weak economy. Although, the lower rates should also start to show up in better GDP growth through 2025, with consensus expectations for over 2% growth this year. The threat of U.S. tariffs has potentially profound negative impacts on the Canadian economy and the amount and implementation of these tariffs remains the wild card. The devil is in the detail, but with almost complete certainty, there will be more tariffs this year than at the end of 2024. U.S. policy interest rates are likely to decline only a little more in 2025, as inflation is bubbling. We expect economic growth to slow only slightly, considering the current U.S. economic condition and political landscape.

Our overarching expectations are for equity markets to move higher in 2025, on the back of the economic and corporate profit backdrop, but with more muted gains than the 20%+ returns of the last couple of years. We also expect heightened volatility, which could include multiple pullbacks along the way, which is normal, as markets don’t move up linearly. The U.S. equity markets likely remain the most attractive option geographically due to the strong economy and due to its domestic companies’ global revenue position.

How are we positioned?

At the beginning of last year, we increased our bond exposure to lock in rates, as we expected rates to come down, and this thesis proved to be correct. We reduced exposure to the Canadian telecommunication, commodity, and real estate sectors in order to increase exposure to the U.S. and global high-yield securities. We anticipated performance from these markets vs. the Canadian market and particularly, the aforementioned sectors – a move that benefited the portfolio’s performance. We expect to further increase U.S. exposure when markets pull back, by taking profits from the bond exposure and moving it to U.S. equities.

Asset allocation is the key to investment success—and we always have had and always will have an active asset allocation process. We have been moving the portfolio to good quality index ETFs to effectively trade it in line with the current asset allocation strategy. And due to more sophisticated trading systems, it is very difficult for active money managers to outperform the market over the long run. Over the last year, we have reduced the number of direct holdings and will continue to do so over the next year and as markets evolve. We believe that quality index units, exposure to a couple of alpha driven mutual funds, and a few high-quality high dividend paying stocks will reward investors over the next 12 months and beyond.

If you would like a copy of our recent strategist report, which is a much more in-depth commentary, please let us know and we will email it. As always, please do not hesitate to contact us with any questions or concerns.

Linda Shick
Senior Portfolio Manager & Senior Wealth Advisor
T: 416-777-7109
linda.shick@raymondjames.ca

David J. Angas, CEA
Senior Financial Advisor, Certified Executor Advisor
T: 416-777-7110
david.angas@raymondjames.ca

Helping families manage the complexities of life’s transitions.

Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Family Wealth Counsel Advisory Group, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.