MARKetS REPORT 2nd Quarter 2024
Dear Client,
Equity markets dipped in early April but bounced back in May. Investors were hopeful for interest rate cuts to boost markets, supported by lower inflation and a positive economic outlook. In June, the Bank of Canada and the European Central Bank cut interest rates, starting their policy-easing cycle. However, the US Federal Reserve Board held off on cutting interest rates due to a strong labor market and sticky above average inflation.
Market performance continued to broaden beyond information technology to other sectors through the second quarter of 2024. Corporate earnings continued coming in better than expected and economic growth, though slightly slowing, remained in good shape.
In Canada, the S&P/TSX Composite Index ended the quarter down 0.5%; in the US the S&P 500 Index was up 4.3% and the Nasdaq Index was up 8.3%. In international markets, the MSCI World Index was up 3.0% and the MSCI EAFE (Europe Asia Far East) Index was up 1.0% this quarter. So far, year to date, the Canadian, US and global stock markets are all in positive territory.
Oil prices continued rising throughout the quarter. Several factors were to blame, including Saudi Arabia led OPEC’s decision to maintain its current production levels and geopolitical tensions in the Middle East. In Canada, the carbon tax increase that came into effect on April 1, further inflated pump prices for gasoline and for natural gas that heats your home.
Canadian employment slowed, leading to an increase in the unemployment rate to 6.2% (up 2% from a year ago) while wage growth decelerated to 4.7%, the slowest pace since June 2023. This data is consistent with an easing labour market which would be welcomed by the Bank of Canada in its inflation battle. Monthly Canadian GDP data for April along with the preliminary estimate for May were also released. April data revealed 0.3% growth month-over-month (MoM). However, the preliminary estimate for May indicated Canadian growth continues to moderate, showing a modest 0.1% MoM gain.
In contrast, the U.S. job market remained robust with the unemployment rate steady at 3.8% while wage growth accelerated. However, U.S. retail sales and personal spending fell slightly, easing fears about a pick-up in activity and inflation. This difference in unemployment rates certainly highlights the diverging paths of the Canadian and US economies.
Inflation, interest rates and central banks
US inflation fell for the first time this year, a welcome relief to investors and the US Federal Reserve Board (they set interest rates in the US). The Consumer Price Index (CPI) measured a 3.4% increase in the 2nd quarter, which was down from the 3.8% increase measured in Q1. While this is a promising announcement, the problem is that core inflation, which includes food and energy, remains sticky and not low enough for the US Federal Reserve Board to consider rate cuts. As expected, the Fed left rates unchanged in the 5.25-5.5% range. The Chairman of the Federal Reserve Board, Mr. Jerome Powell, said while there had been progress toward the Fed’s 2% inflation target, their current policy of keeping interest rates as is would be needed for a longer period, but would prove sufficiently restrictive over time.
Canadian CPI fell back within the Bank of Canada’s 1-3% range and close to its 2% inflation target. Falling prices for food, services and durable goods led the way, although rent prices remained high and there was a pick-up in travel costs. The progress in reigning in inflation was enough for the Bank of Canada to cut its overnight policy rate by 0.25% to 4.75%, the first step towards lower interest rates. Governor Macklem hinted there would be further cuts if inflation continues to ease but reiterated the decision would be dependent on incoming data (inflation, employment, growth, consumer expectations). The expectation is for another rate cut in July.
Similar to the Bank of Canada, the European Central Bank is also making progress towards its 2% inflation target, and echoing the Bank of Canada, the ECB lowered its key policy rate 0.25% to 3.75%. Japanese inflation also continued to decelerate although it remains above the Bank of Japan’s 2% target meaning it may consider further policy measures. As a result, the Bank of Japan kept its policy rate range at 0.0-0.1%.
Inflation moderated in the U.K. as well, coming in at 2%, the lowest reading since April 2021 and in line with the Bank of England’s (BoE) inflation target. U.K. GDP data was also released showing the economy has rebounded after falling into a recession during the second half of 2023. Q1 2024 GDP was 0.6%, the strongest pace of growth since Q1 2021. The BoE opted to keep its bank rate at 5.25% but Governor Bailey noted it was likely the BoE will need to cut rates in the coming quarters and make policy less restrictive.
A new way to save for a first home
As interest rates in Canada decline, houses should become more affordable for prospective first-time Canadian home buyers. I have attached an excellent guide, produced by Fidelity Investments, on the new Tax-Free First Home Savings Account. This type of account was created last year. The annual contribution limit is $8,000 and the lifetime contribution limit is $40,000. When you invest $ into the FHSA, you get an income tax deduction. When you take $ out of the FHSA, the withdrawal is tax-free. Canadian residents aged 18 to 71 who do not own their home currently and have not owned a home in the past 4 calendar years are eligible to open an First Home Savings Account. If you know of a person or couple looking to buy their first home, or really any Canadian who may not own a home but would like to in the future, please feel free to share this guide with them. I can discuss all the investment options available to them through Mandeville Private Client in order to save for that first home purchase.
What can we expect now?
Inflation and anticipated rate cuts continue to drive markets. Central banks are monitoring inflation and underlying economic indicators to assess the timing of rate cuts. Market performance has also been broadening beyond Artificial Intelligence (AI) and the largest (mega cap) technology companies to other sectors as well. This will likely continue as we head into the second half of the year. There might be additional volatility as the U.S presidential election looms in November, but there is little reason to expect a severe slowdown. Volatility and pullbacks are a normal part of investing and present strategic buying and rebalancing opportunities for asset managers.
Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term goals. This strategy helps you keep your emotions out of investing, typically buying high and selling low like many investors do. Ongoing monitoring and reviewing of your portfolio also ensures it remains on track. Diversifying investments reduces risk as well.
Thank you for your continued trust in me and my team for the opportunity to assist you in working toward your financial goals. We are with you every step of your investment journey. Should you have any questions regarding your portfolio, please do not hesitate to contact my office. We can be reached from 9am to 5pm at our office number 519-432-6744 (extension 238 for me and extension 239 for my assistant Susan). Or after hours I can be reached on my cell phone, 519-859-6449.
Until we speak again, I hope you have a wonderful summer.
All the best,
Mark McConnell, BA (Econ.) DipBIS
Senior Investment Advisor, Branch Manager
Mandeville Private Client Inc. is a member of the Canadian Investment Regulatory Organization and a member of the Canadian Investor Protection Fund. Commissions, management fees and expenses all may be associated with investments in mutual funds and exchange traded funds (ETFs). Please read the prospectus before investing. Mutual funds and ETFs are not guaranteed, their values change frequently, and past performance may not be repeated. This publication contains the opinion of the writer. The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness.
The information in this letter is derived from various sources, including CI Global Asset Management, Statistics Canada, U.S. Bureau of Labor Statistics, Bloomberg, National Post, Wall Street Journal, Toronto Sun, and Morningstar as at various dates. This material is provided for general information and is subject to change without notice. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources and reasonable steps have been taken to ensure their accuracy. Market conditions may change which may impact the information contained in this document. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.