Lexicon Financial Group Weekly Update — December 11, 2024
“You get recessions, you have stock market declines. If you don’t understand that’s going to happen, then you’re not ready, you won’t do well in the markets.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
As we move towards the end of 2024, interest rate cuts and inflation are once again in the news.
As expected, the Bank of Canada (BoC) cut its lending (aka policy) rate by half a per cent or 50 basis points, reducing it to 3.5 per cent. This marks the fifth consecutive cut by the BoC this year and the second half-point cut in a row. It’s not without precedent but cuts this large and this fast don’t happen very often. The last times the BoC made two consecutive half-point cuts were at the outset of the pandemic in 2020 and during the 2008 financial crisis.
The BoC has now cut by 175 basis points or 1.75 per cent this year and continues to be the most aggressive rate-cutter in the world. Remember, the cuts come on the back of an economic environment where higher interest rates were used as a stick to beat back inflation globally.
One of the economic costs of high interest rates is that it encourages saving and discourages investment in business. Now that the BoC has conceded that growth in Canada for the second half of 2024 is expected to be slower than forecast, rate cuts are the answer to try and boost the economy. Economic growth in the third quarter came in at one per cent, which is 0.5 per cent below the bank’s forecast, and early estimates for the fourth quarter are expected to come in softer, too.
The Canadian government’s reduced immigration targets indicate that Canada’s gross domestic product (GDP) growth next year will be lower than previous forecasts. On top of this, the two-month GST/HST holiday recently announced by the Canadian government is expected to distort inflation. The BoC expects the measure will temporarily lower inflation to around 1.5 per cent in January, but this impact will diminish after the break ends in mid-February. (1)
What is notable here is that the BoC made this interest rate cut despite the fact that Canada's annual inflation rate rose more than expected to 2.0 per cent in October. Although this was the first pick-up in the annual inflation rate since May, it was largely in line with expectations of the BoC. Remember, though, that two per cent has often been cited as a long-term target for inflation. (2)
Source: Statistics Canada, courtesy of Reuters
In the United States (U.S.), according to 90 per cent of economists polled by Reuters, the Federal Reserve (Fed) will cut interest rates by a quarter per cent on December 18. This would lower the federal funds rate to 4.25-4.50 per cent. Most economists are expecting a pause in late January amid concerns about rising inflation risks until they get a better handle on President-elect Donald Trump's proposed policies, from import tariffs to tax cuts.
Increased tariffs on imports are likely to keep core inflation elevated in 2025, which will make it difficult for the Fed to cut rates more than twice next year. Also, the U.S. economy, which grew an annualized 2.8 per cent last quarter, is expected to grow by 2.1 per cent in 2025 and two per cent in 2026. This would be faster than what Fed officials currently view as the non-inflationary growth rate of 1.8 per cent over the coming years. (3)
Markets prefer stability. Investors do as well. Due to the uncertainty about inflation and interest rates, we should see a bit more market volatility in the few weeks leading up to the presidential inauguration in the U.S.
This volatility could be exacerbated by geopolitical hotspots like the conflict in the Middle East and Ukraine as well as trade wars stemming from the implementation of tariffs. The good news here is that the stock market, on the whole, has always grown in value over the long term. Take the S&P 500 Index (an index that tracks the performance of around 500 of the largest U.S.-based companies) for example. It delivered average annual returns of just over 10 per cent between 2003 and 2023. These returns were achieved despite the index dropping in value during six of those years.
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
Canada Stock Market’s Sharp Rally Can Run Longer Than S&P 500’s
‘If not for the economy, Trump is at least good for the stock market’
European shares close at six-week high on expected China stimulus
Looking Back
The S&P/TSX composite index (TSX) was up slightly at the end of last week, led by technology shares. Bond yields for new bonds fell in anticipation of another outsized interest rate cut from the BoC. This is good news for those holding bonds that were issued earlier in the year when rates were higher. Those bonds should start to appreciate in value, as investors clamour for bonds that pay higher rates. Canada’s unemployment rate rose to 6.8 per cent - a near-eight-year high outside of the pandemic era - while U.S. job growth surged after being severely hindered by hurricanes and strikes. (4)
Major U.S. stock indexes such as the S&P 500 Index, Dow Jones Industrial Average, and Nasdaq Composite all continue to hit record highs. Sector performance was also widely dispersed for the week, as consumer discretionary, communication services, and information technology shares all gained over three per cent while energy, utilities, and materials stocks—typically more value-oriented segments of the market—all fell over three per cent. Geopolitical headlines through the first half of the week were largely dominated by French and South Korean politics but these seemed to have limited impact on U.S. markets.
The U.S. Labor Department reported that the U.S. added a seasonally-adjusted 227,000 jobs in November. This is slightly higher than consensus estimates and represents a sharp rebound from October’s disappointing data amid the fallout from hurricanes in the southeast U.S. and a major strike at Boeing. Unemployment in the U.S. for November increased a tick to 4.2 per cent. U.S. stock markets opened higher last Friday as investors appeared to celebrate the final major labour market update ahead of the Fed’s December meeting.
Major European stock markets finished higher last week. The pan-European STOXX Europe 600 Index ended 2.0 per cent higher, as jitters about political instability in France abated. The markets also appeared to anticipate faster policy easing by the European Central Bank (ECB).
Japan’s stock markets rose over last week and ended the week higher. The weakness of the yen supported the profit outlooks for Japan’s export-heavy industries.
Chinese stocks rose on anticipation of fresh stimulus measures, along with resilient manufacturing data released the week before last. Many analysts expect China’s leadership will announce further action to support the economy during the Central Economic Work Conference, an annual meeting in which top officials map out the economic agenda for the next year which started this week. Expectations are high that the Chinese government will roll out additional measures to ward off the growth risks posed by the incoming Trump administration’s trade policies. (5)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
Bank of Canada cuts its policy rate by another half point, Jordan Gowling, Financial Post, December 11, 2024
Canada's inflation rate jumps back to 2%, curbing large rate-cut bets, Investopedia, Promit Mukherjee and Ismail Shakil, Reuters, November 19, 2024
Federal Reserve to cut rates by 25 bps on Dec. 18, pause in January: Reuters poll, Indradip Ghosh, Reuters, December 10, 2024
The close: TSX extends weekly winning streak on jumbo rate cut prospects, The Globe and Mail, December 6, 2024
Global markets weekly update, T. Rowe Price, December 6, 2024
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Looking to Learn?
If you want to know more about some of the topics we wrote about this week, just click on the links below:
Bank of Canada interest rate drop good news for mortgage holders
Video and Article: Inflation increased in November, complicating Fed's next rate decision