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Macro Update
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This past quarter, the Bank of Canada implemented two rate cuts, bringing its policy rate down to 4.5%. With a June inflation rate of 2.7%, they maintain expectations that Canada’s core inflation will decline to about 2.5% by the end of the year and reach its 2% target in 2025. The Bank’s decision to reduce the policy interest rate is due to easing broad inflationary pressures and excess supply, while acknowledging that high price pressures in shelter and services are keeping inflation elevated. Future monetary policy will be guided by ongoing assessments of these opposing inflationary forces, with a commitment to achieving price stability².
Russell Investments reiterated that a contraction of over 3% in per-capita GDP over the past two years indicates weaker economic health than headline GDP figures suggest. Additionally, The unemployment rate has risen from 5.4% to 6.2% over the past year. This increase reflects difficulties in absorbing the current influx of immigrants into the labour market³.
In the U.S., Vanguard reports that economic growth indicators, such as productivity gains and retail sales, are showing signs of slowing, leading them to anticipate 2024 GDP growth of around 2.0%. Despite recent favorable inflation readings, which have spurred market expectations of a Fed rate cut in September, Vanguard predicts that the Fed may only implement a modest rate cut in 2024 due to persistent high shelter inflation and a need to balance economic risks⁴.
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Asset Update
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Last quarter we saw the S&P 500 start off with a slight dip, but managed to rally and end June with year-to-date returns at 14.48%⁵. Fidelity’s analysis echos its first quarter findings, showing that “Magnificent Seven” accounted for a 17% return, while the remaining 493 stocks were flat¹.
Vanguard’s updated 10 year projections show U.S. large-cap equities ranging from 3.2-5.2%, while small-cap and value have higher projections from 4.4%-6.8%, but carry more risk⁴. Though valuations may be attractive, Russell adds extra caution as they still believe there is a 35% recession risk in the U.S., which would have a stronger negative impact on small-cap companies³.
Similarly, Russell warns that current valuations of Canadian shares are reasonable, but economic concerns warrant a cautious stance. Despite improved earnings-per-share (EPS) growth estimates, potential downturns could harm corporate profitability. They believe that given the economic uncertainty and continued potential BoC rate cuts, government bonds are expected to perform well. They are seen as a safe investment, especially if a recession occurs³.
Summary
Photo by Javier Allegue Barros on Unsplash
The past quarter has been marked by significant economic adjustments, notably the Bank of Canada’s rate cuts. On the asset front, despite positive performance in major indices like the S&P 500, analysts recommend cautious optimism given the potential for economic downturns. As we have seen each quarter, the market is full of surprises and timing is challenging to predict. In this context, diversification is key to managing risk and seizing opportunities, helping investors navigate market volatility and adapt to changing economic conditions.
If you have any questions about how your portfolio is positioned or if you have had any major life changes, we encourage you to contact your advisor!
