Q4 2024
Happy New Year! We hope you had a great holiday season with your loved ones. Below are our views on the current economic landscape and our perspectives on the markets.
2024 – A strong year for the equity markets
A second consecutive year of powerful advances for the S&P 500 and the TSX is behind us. The total return for the S&P 500 in 2024 was 25.0%, after having grown 26.3% in 2023. The TSX Composite also did not disappoint and advanced 21.6% last year, after returning 11.8% in 2023.
A few main factors explain why equities performed so well last year: Falling inflation, lower interest rates, stronger-than-anticipated consumer spending, enthusiasm about AI’s prospects and election-related optimism as investors expect there will be lower tax rates and more deregulation under Trump’s administration.
After such strong performance, it is natural to wonder what can be expected of the markets in 2025 and beyond. Encouragingly, history shows that upward momentum for both the U.S. and the Canadian equity markets tends to carry forward. In the year after positive returns, the S&P 500 has advanced 11.3% on average and was positive 74% of the time. When positive returns extended over two consecutive years, the third year has averaged a 9.1% gain and has been positive about 70% of the time. Looking at the Canadian market, in the year after positive returns, the TSX Composite has advanced 8.3% on average and was positive 66% of the time. When positive returns extended over two consecutive years, the third year has averaged a 4.8% gain and has been positive about 55% of the time.
It is important to note that corrections and volatility are normal features of equity markets, and they are common even in years when markets generate strong gains. To put things in perspective, the S&P 500 has experienced an approximately 16% peak-to-trough price pullback on average each year, with 62% of all years enduring at least a 10% price correction. Yet, the S&P 500 has been up in roughly seven of ten years since 1927 and the TSX Composite has been up in roughly seven of ten years since 1957. 2022 was a reminder that the equity markets’ long-term upward trajectory can be interrupted by sharp corrections, but the long-term trend is usually upwards because the economy and profits in both the U.S. and Canada tend to grow over time.
We continue to watch market breadth, which basically means the direction that most stocks are moving, and so far, so good. Even though a handful of large growth stocks have been driving much of the returns in the U.S., smaller stocks are also trending upwards, signaling the markets may still have further to run.
The economy
Interest rates are coming down in most of the developed world. In the U.S., significant progress has been made towards the Federal Reserve’s 2% objective, and economists’ forecasts look for inflation in the U.S. to settle between 2% to 3% over 2025. From September through December of last year, the Fed brought its benchmark interest rate down from 5.5% to 4.5%, but further cuts might come at a slower pace than other central banks as the consensus view for the U.S. economy is for continued expansion and some regulatory and tax tailwinds. In Canada, The Bank of Canada (BOC) has been cutting interest rates since June, and at a more accelerated pace than the Fed, bringing the rate from 5% to 3.25% over the course of six months, following some economic weakening and lower inflationary pressures.
The U.S. economy has seemingly stabilized in recent months. Certain historic recession signals have been flashing red for some time, yet the U.S. economy continues to show resilience. One traditional recession signal is the inversion of the yield curve, but the inversion happened in October 2022, subsequently dis-inverted in December 2024, and we have yet to see a U.S. recession materialize.
Here at home, expectations for the economy are not as positive. Our labour market, housing and infrastructure have been greatly affected by the high influx of immigrants, and our GDP per capita has been declining due to a surge in population at a time of stagnant economic growth. On a positive note, these pressures should gradually begin to diminish as the government is capping the number of new immigrants at a much lower number over the next two years. We are also looking at the impact blanket tariffs, renegotiation of trade agreements, and increased U.S. oil production could have on the Canadian economy as a result of Donald Trump’s return to the White House. Additionally, the recent renouncing of Prime Minister Justin Trudeau introduces some political uncertainty.
While we do acknowledge there are headwinds, we think the Canadian equity market may not depend as much on political or economic developments at home as it once did. After all, Canadian equities were up over 20% last year despite our economic challenges. Instead, other factors, such as falling interest rates and declining inflation, have arguably been more important. In addition, U.S. growth has benefited many of the Canadian businesses that have become increasingly tied to activity south of the border over the years.
Our Portfolios
Our portfolios have greatly benefited from the strong performance of equities in North America in 2024.
We continue to prioritize quality stocks in our portfolios and maintain a diversified approach. As volatility is an inherent part of equity investing, we value the stability that dividends provide. Our dividend approach continues to offer a consistent income stream despite the direction the markets may be going in the short term. In the past quarter, our portfolios saw 16 dividend increases and 1 special dividend. In 2024, there were 54 dividend increases and 4 special dividends in total.
If you like keeping up to date with market and economic developments, as well as financial planning topics, we recommend visiting the Publications page on our website.
Should you have anything on your mind you would like to discuss, please let us know.
Warm regards,
Bow Valley Wealth Management Group
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