Capital Markets Overview
- After a year of impressive gains in 2023, Capital Markets continued their strong run in 2024. Equity performance was exceptionally strong in 2024 while Fixed Income posted modest returns.
- Economies remained resilient and afforded Central Banks time to allow inflation to continue to moderate before beginning to cut interest rates mid-year to more accommodative levels.
- US Equities (S&P 500) once again led global markets (+25.0%) while Canadian Equities (S&P/TSX) also performed very well (+21.7%).
- The Canadian Bond Universe (representing government and corporate bonds of varying maturities) was up a modest +3.6% in 2024.
2024 Equities Commentary
- US Equities (S&P 500) were up a very strong +25.0% (in USD terms) in 2024. In Canadian Dollar terms, US Equities were up a staggering +36.4% with help from the strong appreciation of the US Dollar (+9.1% in 2024). Like 2023, Mega-Cap technology stocks continued their strong run over excitement surrounding AI and its potential applications. The “Mag 7” stocks (Apple, Nvidia, Microsoft, Amazon, Google, Meta and Tesla) were up on average about 60%.
- Canadian Equities (S&P/TSX) were up a very strong +21.7% in 2024 led by strong gains in the Materials, Financials, IT and Energy sectors.
- The MSCI World Index was up +28.7% in 2024, but was heavily influenced by its 70% US weighting. The MSCI EAFE Index, representing developed markets outside North America, was up +13.8% in 2024.
2024 Fixed Income Commentary
- The Canadian Bond Universe was up a modest +3.6% in 2024. Short-Term Bonds (+5.5%) outperformed Long-Term Bonds (+0.9%) during the year.
- Investors were rewarded for taking on higher levels of credit risk in Portfolios as Corporate Bonds (+6.6%) outperformed Government Bonds (+2.8%) in 2024.
- After the Bank of Canada dramatically raised its key interest rate to 5.0% to combat inflation in 2023, they began cutting at a rapid pace commencing in June of 2024. The overnight rate now sits at 3.25% (1.75% lower than the start of the year).
- Despite the magnitude of the rate cuts, Long-Term Bond yields remain at similar levels as they were at the start of 2024 versus Short-Term Bond yields which are now at much lower levels.
2024 Economic Review
- Despite the elevated and restrictive Policy rates that Central Banks had in place going into 2024, economies remained generally resilient.
- Once Central Banks became comfortable that inflation was under control, they began to cut interest rates. The Bank of Canada cut its policy rate from 5.0% to 3.25%, while the US Fed lowered its policy rate from 5.5% to 4.5%. More signs of weakness in the Canadian economy, as well as better progress on inflation were main contributors to the larger rate cuts in Canada.
- The Canadian Dollar plunged -8.3% versus the US Dollar on the year (from $0.756 to $0.694) as interest rate spreads between the US Treasuries and Canadas widened substantially.
- Current inflation rates in Canada and the US are 1.9% and 2.9%, respectively, and are much more aligned with the 2% Target than one year ago when Canadian and US inflation rates were both at 3.4% (and from June 2022 when inflation was 8 – 9%).
- Canada’s GDP is estimated to have grown by 1.3% in 2024 versus the US GDP forecast of a much healthier 2.7%.
- Despite positive GDP numbers for Canada, GDP per Capita, which has fallen for 6 consecutive quarters, paints a more worrisome picture for the economy. Since the start of rate hikes in 2023, it has fallen -3.4% versus the US GDP per Capita which has risen by +4.9% over that same period. This cumulative fall in GDP per Capita is unprecedented outside of a recession.
- The current Unemployment Rates in Canada and the US are 6.7% and 4.1%, respectively. Outside the Covid pandemic, this is the highest rate in Canada since 2017.
2025 Economic Outlook
- Central Banks are expected to continue to cut rates in 2025. However, the magnitude of these expected cuts has diminished over the last few months. The US Economy is in fairly good shape though inflation remains sticky, which supports fewer rate cuts. Canada’s economy is on shakier ground, but the Bank of Canada may be more cautious to cut rates and further widen their policy rate with the US given the weak Loonie.
- Although stock markets welcomed the US Presidential result, Trump is a wildcard as his tariff threats and imperialistic ego loom over both the Global and Canadian economies.
- 2025 GDP growth forecasts for Canada are generally around 1.5% versus 2.0% in the US.