The US locomotive

The US economy continues to defy the predictions of the doomsayers. Unlike other countries - notably Canada, where growth is slowing and unemployment rising - the US economy remains robust, the job market is doing well and profits are rising sharply: +12% in 2024.

This relative dominance of the US economy is reflected in the performance of its stock market: up 25% (in USD) in 2024 and 54% over the past 2 years. This rise is reminiscent of the performance of US equities during the tech bubble of the 90s. We're on the verge of euphoria.

The strength of the US economy has another important consequence for Canadian investors: while the Bank of Canada has gradually lowered its key rate by 1.75% (to 3.25%) to support the economy since June 2024, the US Federal Reserve has cut its rate by only 1%, to 4.5%. The difference in rates is fuelling demand for the US dollar, which will rise by over 8% against the CAD in 2024, boosting the performance of US investments for Canadian investors. The return on the U.S. stock market in CAD was therefore 36.4% in 2024!

Although less spectacular, the Canadian stock market still posted an excellent return of 21.7% in 2024, including a 3.8% rise in Q4. Many large Canadian companies earn their profits in USD, so the rise of the US currency has boosted their profits when converted to CAD.

The bond portion of the portfolio also contributed to the return, up 4.2% in 2024. Bonds suffered from the rise in interest rates in 2022. They have now recovered this decline in value (including interest received). They now yield 3.7% interest annually, and will partially immunize the portfolio in the event of a stock market downturn.

It will also be recalled that a number of experts predicted the death of the traditional 60-40 portfolio. According to them, rising interest rates (at around 0.50% on a 10-year bond in early 2022) would decimate not only bonds, but also equities. However, this good old portfolio of 60% equities and 40% bonds generated a return of 16.1% in 2024 and over 6% annually for the past 3 years. Not bad for a deceased investor!

Happy 2025 to all!

Market Review

Canadian Equities: Surge in Q4 as policy shifts fuel growth

Up 3.8% (21.7% year-to-date), the Canadian stock market showed notable strength. This performance was broad-based, with five of the eleven sectors posting positive returns. The best-performing sectors were energy (+5.4%), consumer staples (+3.3%), financials (+5.7%) and information technology (22.1%).

The stock market's performance can be attributed to factors such as a more rapid shift in monetary policy from restrictive to neutral, as evidenced by the cut in the key interest rate aimed at maintaining stable economic growth and inflation close to its target. The adjustment in interest rates has led to a depreciation of the currency, improving the competitiveness of Canadian exporters by making their products more competitive on world markets. This also leads to foreign exchange gains when their USD profits are converted into CAD.

Firm commodity prices supported the Canadian market. Crude oil prices, which are vital to Canada's energy sector, showed some improvement in the fourth quarter of 2024, rising by over 5%, with the price of West Texas Intermediate (WTI) crude oil recorded at $72.44 per barrel on December 31, 2024.

US equities: full steam ahead!

U.S. equities had another good quarter, up 9.2% (in Canadian dollars), taking their year-to-date return to 36.4%.

The consumer discretionary (+14.1%), financial services (+6.7%), information technology (+4.7%) and communication services (+8.6%) sectors were among the best performers.

The consumer discretionary sector stood out, with retailers benefiting from a surge in holiday shopping. Major companies in the sector, such as Amazon, Tesla and home improvement giants like Home Depot, reported better-than-expected earnings, boosted by strong consumer demand and supply chain improvements.

Inflationary pressures showed signs of easing, contributing to a favorable environment for equities.

Investor sentiment remained positive throughout the fourth quarter, boosted by solid corporate earnings and economic resilience. Concerns about potential changes in fiscal policy under the new administration introduced a degree of caution into the market.

International equities: we don't like Trump!

The international equity portfolio generated a return of -2.0% (in Canadian dollars) over the quarter, up 13.3% year-to-date.

While the Nikkei 225 has rebounded from its August low, it remains a long way from the record set in July. The Japanese stock market returned 2.1%, reacting cautiously to news of Trump's re-election.

The MSCI Europe index fell -4.0% over the quarter, up 10.7% since the start of the year. This decline is largely due to the uncertainty surrounding Donald Trump's fiscal and customs policies, which threaten to disrupt markets.

Emerging Markets: Lackluster performance

The MSCI Emerging Markets index returned -1.9% (in CAD) in the fourth quarter of 2024.

China returned -1.5% despite the announcement of a stimulus package in the last quarter, as the outlook for Chinese equities remains uncertain due to concerns over the country's growth prospects and threats of tariffs from US President-elect Donald Trump.

Taiwan returned 8.4%, buoyed by the promising growth trajectory of the AI sector.

Political unrest in South Korea had a negative impact on investor confidence, resulting in a -13.5% drop in yields.

Bonds: the revenge of Canadian bonds

The yield to maturity on 10-year Canadian government bonds rose from 2.95% in September 2024 to 3.23% in December 2024, leading to a decline in the Canadian bond market. This occurred despite a larger-than-expected drop in inflation (to 1.9% in November) and an interest rate cut by the Bank of Canada (the benchmark overnight interest rate was reduced by 50 basis points to 3.25% in December).

Weakness in Canadian bonds over the last quarter reflects a very weak US bond market that saw sharp rate rises, as investors reduced their expectations of future rate cuts by the US Federal Reserve.

Nevertheless, Canadian bonds clearly outperformed U.S. bonds in 2024 with a total return of 4.23%. With a yield to maturity of 3.23%, Canadian government bonds maturing in 10 years provide stable income and will help protect the portfolio in the event of a stock market correction.

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