Market Musings December 2024
First, given the Canada Post strike just before the holiday season, we made the tough decision to break with tradition and only send electronic cards this year. Our annual card budget has been donated to charitable organizations that we support.
One quote has been rattling around our brains recently. It’s from famed economist John Maynard Keynes; “The market can stay irrational longer than you can stay solvent.” Our two immediate takeaways:
Despite many people postulating about U.S. equity market valuations being stretched, and citing Warren Buffet’s exceptional cash position, the economic backdrop and corporate earnings outlook could support the continuation of this state for some time.
The second reason that the quote seems to resonate right now is if we consider the spirit of the quote as it might reflect on the current political environment. Specifically, we are thinking about how it would relate to president-elect Trump’s recent social media post threatening a 25% tariff on all goods entering the U.S. from Canada. That threat might sound irrational given its obvious negative impact on the U.S. economy and consumers. Although we don’t anticipate it being ultimately executed as advertised, we cannot simply dismiss the potential damage that such a policy, even if watered down, could inflict on the Canadian economy. Investors should take this warning shot as a reminder to stay properly diversified and within their risk tolerance.
Looking back, as we finish off 2024, we can summarize it as both gut-wrenching and better than expected. In the U.S., we lived through one of the most contentious elections in recent memory but exited with strong messages from U.S. voters about their concerns, mostly about the economy and their standard of living. Despite those concerns, the U.S. economy has been surprisingly resilient, with relatively high GDP growth, still low unemployment rate, and inflation that is heading back to trend. The price level reset from that period of high inflation has obviously had a major impact on many, but the rate of growth going forward is almost back to target. The Federal Reserve (Fed) now has a balancing act in managing its policy interest rate as it tries to bring it back to a neutral level to keep growth from slowing too much, while still working on getting inflation back to target without letting it push back up.
The Fed’s job may get more difficult if Trump follows through on massive tariff programs, as they would likely push inflation back up, but we’ll have to wait to gauge the severity and extent of those impacts. With the favourable economic backdrop, and still strong corporate sales and earnings growth, the U.S. stock market has continued to push higher, helped in November with the ‘Trump Trade’ and expectations of lower taxes and deregulation. While growth may be more muted over the next 12 months, and valuations in certain sectors look strained, the overall backdrop remains favourable for a positive 2025.
The Canadian outlook is not as positive as the American one. Economic growth has been weaker north of the border, and although we’re not seeing signs of contraction that would lead us into a recession scenario, we are still looking at meagre growth below the potential of the country. This has been partnered with a higher unemployment rate. Population growth has played an important part in both metrics, as more consumers have pushed up GDP, while adjusted for population, GDP per capita has shown declines in this proxy of standard of living. Having more people in the labour force, but unable to find jobs, has pushed up the unemployment rate. Recent announcements of significant immigration restrictions on both permanent and temporary residents, are expected to bring population growth down. The reduction in the labour force will likely also alleviate some upward pressure on the unemployment rate, although this might also increase labour costs and therefore inflation pressure, which should be more that offset by lower shelter cost inflation. The result will likely be the continuation of disinflation, and slower economic growth, which will further induce the BoC to continue lowering interest rates.
Macro and market highlights and for November
- Canadian October inflation Index (CPI) headline rebounded slightly more than expected, back up to 2.0%, from 1.6% in September. Along with possibly stronger GDP growth in 4Q24, BoC rate cutting could slow.
- A new Canadian two-month (GST/HST) tax holiday on certain items and proposed $250 rebate could temporarily boost GDP with some upward inflation pressures, although tariff clouds could more than trump any benefits.
Financial Market Highlights
- The Canadian and U.S. equity indexes accelerated their growth in November with roughly 6% returns on the month. Meanwhile, bond prices were weaker due to fears of inflation, which has been further compounded by the election results in the US and the president elects tariff comments. All figures represent total returns in local currency.
- Small and Mid Cap stocks have started to pick up steam following months (if not years) of large cap/Mega cap dominance. A more favorable economic backdrop as well as an easing cycle from the fed are contributors to this.
- Canadian sectors that did the best in November were Info Tech, Financials and Energy, while Communication Services, Materials and Real Estate were the weakest.
Upcoming
- Our analysts expect rate easing to continue in Canada until the policy rate hits 2.75% at the April 16 meeting.
- We see further downward pressure on inflation (in Canada); the Canadian economy should operate below potential.
- Trump’s social media blasts, tariff threats, and bi-lateral negotiations are likely to cause more volatility and (Canadian) investor anxiety over the next couple of months until we gauge how seriously to take recent posts after the January 20th inauguration.
Thank you and wishing you wonderful holidays and close to 2024.
As always, we welcome your questions and comments.
Erik, Guillaume, and the team at Patrimonia
Disclaimer
Erik Moisan and Guillaume Desjardins-Tessier are Portfolio Managers with Raymond James Ltd. The views are those of the authors, 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. Commissions, trailing commissions, management fees and expenses all may be associated with mutual funds. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.
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