Market Overview

US and Canadian equity markets are rallying significantly off their lows from 2022/2023. Bond markets rallied up until mid September and then experienced a mild pullback. While we expect rate cuts to continue after this October’s 0.50%, we are also expecting an economic slowdown as the previous rate hikes slow down the once over-heated economies.

 

With the three 25 basis point (bps) and additional 50bps cut in Canadian rates along with the surprise 50bps cut in the U.S. Federal Reserve interest rate, we are now steadily on a downward trajectory for interest rates over the next four to six quarters. Some interest rate strategists are anticipating a further decline of 1.25 to 1.5 percent in Canadian interest rates and another 1 to 1.25 percent in the U.S.

In my last strategy update, I mentioned that we were beginning to rotate back into globally managed fixed income ETFs, indexes, mutual funds, or hedge funds. This shift reflects our anticipation of excess returns compared to the interest earned by holding direct bond investments, which we began purchasing between late 2021 and March 2023 after selling off globally managed ETFs, indexes, and mutual funds. As noted in previous updates, this strategy allowed you to avoid most of the worst fixed-income market performance in recent memory (i.e. most of 2022). Now, we are seeing the opposite: a bond rally delivering higher total returns, including both interest income and capital gains.

We capitalized on this shift by repurchasing preferred share index/ETF holdings, such as Dynamic’s DXP and Global X’s HPR (formerly Horizons), starting in March and continuing through as late as September 2024. To remind you, I sold DXP and HPR between late 2021 and 2022 after a 35% rally from the COVID-19 lows. Since buying DXP and HPR back, we have experienced returns exceeding 20%, factoring in both capital appreciation and dividends paid. Preferred shares tend to exhibit cyclical price movements, with periods of decline followed by increases, and this cyclical nature is why I have bought and sold preferred shares several times over the past 12 years. By capitalizing on these price cycles, we achieved superior tax efficient fixed-income returns.

Our fixed income portfolios over the past year exceeded 10%. Earlier this year, I projected returns between 9 and 12%, and we may approach the upper end of that range if there are no major disruptions.

 

Equities:

Even after the equity rally over the past year, we anticipate continued growth in the broader market, particularly among dividend growers. While these stocks have rallied significantly from their lows, they may continue to rise over the next year and a half, though some pullbacks are likely along the way. If interest rates continue to decline, we expect a rotation back into previously beaten-down dividend stocks, as rising rates from 2022 to 2024 had depressed their prices. Lower interest rates make dividend yields more attractive relative to bonds, which could drive further demand for these stocks.

Market movements rarely follow a straight path, and I would not be surprised to see a 15% or greater correction following this current rally. With declining interest rates, we are also seeing corporate cost reductions, which could potentially improve bottom lines over the next year or two. However, consumers face challenges. Despite the recent easing of interest rates, the previous increases still have a lingering impact, particularly on pricing power. Consumer spending may affect broader market performance, especially in sectors reliant on discretionary spending. We are currently in a back-and-forth sentiment between a growing economy and recession fears due to concerns that rates climbed too high. As a result of these challenges, I expect equity sector rotation and a broadening of market returns beyond just technology, which could lead to short-term volatility.

 

Conclusion

We hope that everyone can take some time this fall to enjoy a break! We appreciate and value your trust. Please contact us if you need anything. We are available to meet by phone, WebEx, or in person.

 

** Here’s the fine print and there’s a lot of it…

Currency can add return when the Canadian dollar goes down but reduce returns when the Canadian dollar goes up for non-currency hedged US and international investments. Also, please remember that your US accounts report values in US dollars.

Securities or investment strategies mentioned in this newsletter may not be suitable for all investors or portfolios. The information contained in this strategy update is not intended as a recommendation directed to a particular investor or class of investors and is not intended as a recommendation in view of the particular circumstances of a specific investor, class of investors or a specific portfolio. Options, and other strategies mentioned, may not be suitable for all investors. You should not take any action with respect to any securities or investment strategy mentioned in this newsletter without first consulting your own Portfolio Manager or in order to ascertain whether the securities or investment strategy mentioned are suitable in your particular circumstances. This information is not a substitute for obtaining professional advice from your Portfolio Manager. The commentary, opinions and conclusions, if any, included in this newsletter represent the personal and subjective view of Daniel Kelly who is not employed as an analyst and do not purport to represent the views of RBC Dominion Securities Inc. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. Investment Trust Units are sold by RBC Dominion Securities Inc. There may be commissions, trailing commissions, management fees and expenses associated with Investment Trust investments. Please read the prospectus before investing. Investment Trusts are not guaranteed, their values change frequently, and past performance may not be repeated. (Keep reading, there’s only 7 more sentences to go.) This commentary is based on information that is believed to be accurate at the time of writing and is subject to change. All opinions and estimates contained in this report constitute RBC Dominion Securities Inc.’s judgment as of the date of this report, are subject to change without notice and are provided in good faith but without legal responsibility. Interest rates, market conditions and other investment factors are subject to change. Past performance may not be repeated. The information provided is intended only to illustrate certain historical returns and is not intended to reflect future values or returns.   RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ®Registered trademarks of Royal Bank of Canada. Used under licence. ©2024 Royal Bank of Canada. All rights reserved.

 

Investment portfolios are not guaranteed, and past performance is no indication of future returns. In addition to these portfolios not being a guaranteed investment, there can also be significant fluctuations in the value of the portfolio. Did anyone read this far?