Lexicon Financial Group Weekly Update — November 20, 2024
“Though tempting, trying to time the market is a loser’s game. $10,000 continuously invested in the market over the past 20 years grew to $63,636. If you missed just the best 30 days, your investment was reduced to $11,484.”
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
Global equity markets suffered their second monthly loss (falling 2.3 per cent) for 2024 in October. The elections in the United States (U.S.) continued to dominate investor thinking in October due to fears that the outcome would not be determined for weeks. And why wouldn’t investors think that – it’s all the media seemed to be talking about. It rattled the entire market, including the previously reliable large-cap technology stocks.
Europe struggled to generate economic growth, while signs that inflation was still present tempered central banks’ ability to lower interest rates. As we’ve written about before, it is a common central bank policy to raise interest rates to fight inflation.
In Asia, the optimism that had been triggered by China’s announcement of a broad stimulus package before Golden Week dissipated as the actual details failed to inspire investors. Chinese equities fell nearly six per cent in October after a 23 per cent increase in September. The Bank of Japan reiterated its hawkish policy stance, but the yen depreciated nearly six per cent against the strong U.S. dollar, erasing a modest gain in the local market. India was the weakest market in Asia, falling 8.3 per cent, as valuation concerns stifled enthusiasm.
When we look at market declines from October, it’s worth remembering that, in broad terms, global equity markets remain up 15 per cent for the year. (1) In the United States, the S&P 500 hit its 50th record this year, on its way to topping the 6,000 level. (2)
So, it appears that 2024 is turning out to be a good year – a welcome good year, given the turmoil of the past four years. But, just as we’ve said all along, even the best data and data analysis cannot predict the unpredictable, which is why markets faltered this week, after reports that Ukraine had fired a U.S.-made long-range missile into Russia for the first time and Vladimir Putin approved changes to Russia’s nuclear doctrine. Geopolitical events proved once again that they do not matter for the markets until they do. (3)
If we look back in history – which would cover all types of geopolitical events – November and December have tended to be solid equity performance months for the markets. Of course, it would be wise to remind everyone that past performance is not an accurate indicator for future performance. That being said, let’s take a quick look at some of the risks that are currently present in the market.
Stubborn Inflation: Although inflation is trending downwards, it is still volatile. As with everything, the last stretch to two per cent inflation may be the hardest. Remember, too, that a two per cent inflation is an arbitrary target set by central governments.
The Federal Reserve’s Interest Rate Dance: This dance by the Federal Reserve is on a tightrope - raising rates too aggressively could stifle economic growth, but not raising them enough risks reigniting inflation. The outcome here could take a toll on the markets, precisely because markets often do better in environments where more of the variables involved in decision making are stable. This is true for individuals as well… If you have confidence that interest rates, for example, are fairly stable, it helps you decide about when and how much to borrow. Uncertainty makes a decision like this far more challenging.
Dicey Stock Pricing: Currently, global stock market presents significant challenges that make it difficult to maintain a bullish outlook. By some measurements, large-cap stocks appear overvalued. Other measurements suggest that the markets still have some room to grow, since earnings at large companies (as a ratio of their market value) are down from the peaks we saw earlier. The reason for this is that earnings are up.
Ongoing Military Conflicts: These are black swan events that are hard to predict. The impact of the market is only felt in hindsight. When Russia invaded Ukraine over 1000 days ago, the spike in global oil prices lasted only a few months.
Debt Domino Effect: Globally, public debt is also rising and is about U$100 trillion, according to the International Monetary Fund. The IMF estimates that, in a difficult scenario, global debt could be 20 per cent higher than baseline projections by 2027, which could lead to significant economic upheaval globally. (4) This will most certainly create a problem if we see spikes in interest rates to combat global inflation.
The bottom line? Diversified portfolios reduce overall portfolio risk. Costs matter, which is why we keep investor costs low by using exchange traded funds. But perhaps, most important is having and sticking with a well-articulated investment plan that matches your outcome.
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
European markets close lower as investors monitor Russia tensions
Asia markets mostly lower as China keeps lending rates steady; investors assess Japan trade data
Looking Back
North American main indexes closed lower last Friday, after Federal Reserve Chair Jerome Powell pointed to a slower pace of interest rate cuts and investors reacted to cabinet selections by U.S. President-elect Donald Trump. Powell cited ongoing economic growth, a solid job market, and inflation above the U.S. central bank’s two per cent target as reasons it can afford to be careful with the pace and scope of future rate cuts. Consequently, traders increased bets that the Federal Reserve will not change rates at its December meeting, pricing in a roughly 42 per cent chance, versus roughly 14 per cent a month ago, according to the CME FedWatch tool. Expectations for easing in 2025 have also been dialled back. This view was reinforced by last Friday’s economic data showing U.S. retail sales rose slightly more than expected in October. Import prices also rebounded and data released on Wednesday and Thursday showed sticky inflation.
The S&P/TSX composite index ended last week slightly up after posting a record closing high on Thursday. Seven of ten major sectors on the Toronto market lost ground, including the resource sectors. Energy was down 1.2 per cent, with the price of oil settling 2.45 per cent lower, at US$67.02 a barrel, as investors fretted about weaker Chinese demand. The materials group, which includes fertilizer companies and metal mining shares, ended 0.9 per cent lower while financials lost 0.6 per cent. Among the S&P 500′s 11 major industry sectors, information technology was the day’s biggest loser, dropping 2.5 per cent. Adding to last Friday’s volatility was the regular expiration of stock and index options. (5)
In Europe, concerns about the incoming Trump administration’s trade policies and political upheaval in Germany weighed on investor sentiment, as did Federal Reserve Chair Jerome Powell’s cautious comments on U.S. interest rates. Major stock indexes finished the week mixed.
In Japan and China, major equity markets moved lower last week. The prospect of President-elect Donald Trump’s incoming administration raising tariffs weighed on the outlook for those Japanese companies that are heavy exporters to the U.S. Chinese equities declined as evidence of persistent deflation and worries about potential U.S. tariffs under incoming U.S. President Trump hurt investor confidence. (6)
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.
Monthly Factor Report – Global, Lazard Asset Management, November 1, 2024
S&P 500 Notches Its 50th All-Time High in 2024: Markets Wrap, Rita Nazareth, Bloomberg News, November 7, 2024
Global stock markets fall and bonds jump as fears grow over Ukraine war, Graeme Wearden, The Guardian, November 19, 2024
Will the Stock Market Crash in 2024? 7 Risk Factors, Brian O’Connell, U.S. News, November 4, 2024
The close: Stocks sink on Powell rate-cut caution, Trump cabinet picks, The Globe and Mail, November 15, 2024
Global markets weekly update, T. Rowe Price, November 22, 2024
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