Quarterly Commentary as of December 31, 2024

 

Following the US Federal elections on November 5th, and in anticipation of the continuation of economic policies favorable to the American economy (low corporate taxes, debt expansion, and deregulatory measures), stock markets have been propelled upwards. However, with economic data on inflation continuing to surprise to the upside, financial markets quickly reacted by pushing US government interest rates upwards as well. Consequently, the benchmark 10-year US government bond has approached the critical 5% mark. This level is important because it implies that the yield on a guaranteed bond can yield 5% per year for 10 years. History tells us that investors tend to want to readjust their equity weighting downwards, thus favoring bonds.

 

We believe that much of the scope of Mr. Trump’s new policies will be influenced by the economic data in coming months. With the US economy already on a strong run, upcoming inflation and labor market data will continue to influence interest rate trends. If the 10-year rate rises above the 5% benchmark, equity markets could see a correction while waiting for inflationary pressures to ease. And, in the event that the US 10-year rate stabilizes and returns to 4%, this will give the new president more room to maneuver. After reaching 4.85% in mid-January, the US 10-year interest rate is trading around ~4.60% at the time of this writing.

 

As a reminder, the last time the US 10-year rate reached 5% was in October 2023, when equity market volatility rose significantly.

 

As the Canadian economy is already slowing down, the comparable rate of a 10-year Canadian government bond is trading at ~3.30%. The last time we had such a large gap between US and Canadian interest rates was in the late 1990s.

 

In the interest of our loonie, Canada should not stray too far from American interest rates, as well as business-friendly policies as this could risk making Canada far less attractive for businesses, exacerbating other current issues.

At $0.69 against the US dollar, the level of the C$ dollar reflects the gap between interest rates and low tariffs on exports. It is also worth noting that Canada’s exports to the United States represent 20% of our GDP (~ total revenues of our economy), which places us in 3^rd place globally among the countries most dependent on the American economy.

 

 

RBC Economics forecasts a relatively weak Canadian dollar in 2025 compared to the U.S. dollar. We see one of the following 2 scenarios unfolding:

1. In the event that unilateral tariffs of 25% are imposed on exports to the United States, the Canadian dollar could trend towards $0.65, or…
2. In the event that tariffs prove to be specific to certain industries, the Canadian economy, supported by the impact of its rate cuts, could regain altitude in the second half of 2025, and the dollar could return to $0.73

 

Q4 2024 Performance

The last quarter of the year ended on a positive note. As a highlight, following the US election and tariff threats, the US dollar jumped significantly by 6.3% against the Canadian dollar during the quarter. Here are the results in CAD for the various indices for the quarter ending December 31, 2024:

• +3.8% for the Canadian S&P/TSX Index
• +8.9% (2.4% + 6.3%) for the US S&P 500 Index in C$
• (-2.6%) for the Europe-Asia-Far East Index
• 0.0% for the FTSE TMX Canadian Bond Fixed Income Index

 

Quarterly performance: for a balanced portfolio, the return fluctuates between +2.5% and +3.5% depending on the proportion of US dollars held. And the performance for the year 2024 for a balanced portfolio are generally between +15% and +17% in CAD.

 

Thoughts for 2025

From a performance perspective, we had two good consecutive years in 2023 and 2024, in which the favorable “soft landing” scenario seems to have resulted. This began in 2022, with record interest rate increases set to slow the pace of inflation. While the high inflation seen in 2022 seems to have been tamed, paving the way for a reduction in interest rates, a recession has yet to materialize.

 

During these years, the enormous wave of investment in artificial intelligence benefited the largest American technology companies, which helped maintain investors’ enthusiasm.

 

In 2025, we believe that rate cuts will be less of a contributory factor than in 2024. And that to maintain equity market indices at and above current levels, companies will have to continue to surprise to the upside with increased profitability. This may prove to be a challenge, especially considering the looming protectionist policies from the new Trump administration.

 

We should expect more volatility in 2025, and our return expectations will be much more in line with long-term return averages. The equity asset class achieved returns of more than 10% in 2023 and more than 20% in 2024, which tends to be out of the ordinary. In this context, our message is as follows: after 2 years of solid returns, we advise you to contact us to discuss any withdrawals for short-term projects you may be considering. Otherwise, we will continue to favor quality investments, and make the necessary adjustments to achieve your long-term financial objectives.

 

The entire team thanks you for your trust and we wish you an excellent beginning to the new year!

 

The past wasn't as good as you remember,

The present isn't as bad as you think,

And the future will be better than you anticipate. -Morgan Housel

 

Mathieu & Anthony

 

 

Appendix - RBC DS Portfolio Management 2025 Conference from January 8 to 10, 2025

Interesting Charts

1) We heard lots from both sides of the global economic clans; traditional Western countries and the BRICS countries (Brazil, Russia, India, China, South Africa). At the end of 2023, the value of the world economy was estimated at US$105 trillion. The following chart shows the distribution of the two major economic blocs, the weight of the main countries in trillions of US$:

2) The cost of being a homeowner in major Canadian cities as a proportion of earned income for a household as of September 30, 2024. You will notice the Canadian household devotes on average 58% of its earned income to cover the cost of housing.

 

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