Macro Update
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The Bank of Canada continued its easing cycle on October 23, 2024, reducing the policy rate by 50 basis points to 3.75%—its largest cut this year. Canada’s CPI has fallen to 1.6%, below the 2% target, with core inflation now under 2.5%. While growth remains modest and the labour market soft, excess supply and lower global oil prices are helping ease inflation, though shelter costs remain significant.¹
Looking forward, the Bank projects growth at 1.2% in 2024, increasing in 2025, with inflation expected to stay near 2%, keeping costs manageable for Canadians. The lower interest rate should gradually support growth in consumer spending, housing, and business investment.¹
Russell Investments notes that the U.S. economy is showing more signs of a potential soft landing as inflation has cooled significantly, prompting the Federal Reserve to cut interest rates. While employment growth is slowing and unemployment has risen slightly, layoffs remain limited, suggesting the job market is adjusting without typical recessionary job losses. The Federal Reserve’s proactive rate cuts aim to maintain economic stability, though risks remain if consumer caution leads to reduced spending and increased layoffs.²
Asset Update
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The S&P 500 delivered a 5.53% gain for the quarter, lifting its year-to-date (YTD) return to an impressive 20.81%³. Solid corporate fundamentals continue to support growth, with earnings expected to expand beyond just the largest companies.² Vanguard’s latest outlook reflects this with slightly adjusted long-term projections, lowering expectations for U.S. large-cap stocks while raising them for small-cap stocks over the next decade.⁴
Meanwhile, their 10-year fixed-income projections are offering returns similar to equities, but with less volatility, appealing to conservative investors.⁴ Still, Russell notes that recent drops in Treasury yields have brought them to fair value, prompting some portfolios to reduce their bond holdings.²
Since they believe equities are priced for a stable economic adjustment, the possibility of a tougher downturn adds some risk. They underscore the importance of maintaining diversified U.S. portfolios to manage potential market swings effectively.²
Hot Topic: Red or Blue
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As the 2024 U.S. election approaches, investors can expect continued market volatility beyond typical business cycle uncertainties. Russell has highlighted that key economic risks to monitor include potential tariff increases, changes to corporate tax rates, and challenges to Federal Reserve independence. Despite these short-term concerns, they note that historical trends show that U.S. stocks have generally trended upward over the long term, regardless of which party controls the White House. Moreover, diversified portfolios have typically delivered positive returns in election years, a pattern expected to continue in 2024.² While political outcomes may create short-term market fluctuations, maintaining a well-balanced, diversified portfolio aligned with long-term financial goals remains a prudent strategy for navigating election-year uncertainties.
Summary
Photo by Luca Bravo on Unsplash
The Bank of Canada accelerated rate cuts last quarter, during increasing economic pressure for Canadians. In contrast, the U.S. has navigated its economic environment more effectively, offering greater stability and boosting confidence in U.S. assets, even amid higher valuations. As the U.S. election approaches, investors can expect continued market volatility. With this and the U.S. potentially positioned for a soft landing, diversification across asset classes and regions is essential to manage market volatility and shield against economic uncertainty.
We encourage you to connect with your financial advisor to ensure your portfolio aligns with your life stage and financial goals, enhancing resilience in an evolving market.
