Canada's economy was a bit of a mixed bag in Q1 2024. Considering the economic challenges it faced, a US demand from Canada has helped the Canadian economy avoid a recession. Real GDP at basic prices grew by 0.6 percent in January and showed preliminary signs of a 0.4 percent growth in February. However, the interest rates have been a bit of a thorn in the economy's side, having gone up at about the same pace in Canada as in the U.S. The result? A more pronounced drag on the Canadian economy compared to its southern neighbour.
The Canadian economy is grappling with the consequences of questionable management, as the Canadian dollar continues to weaken in comparison to the US dollar. This decline is driving up the cost of goods in Canada, particularly for food and other products priced in USD. The markets are anticipating a more modest rate cut in Canada, which presents a challenge for the Bank of Canada as it seeks to balance interest rates with economic growth. In contrast, the US is less inclined to lower rates due to low unemployment and a robust economy.
The Canadian economy is facing further challenges as the employment rate experienced its sixth consecutive monthly decline, marking the longest period of consecutive decreases since April 2009. There are few indications of immediate improvement. A contributing factor to the rising unemployment is the influence of mass migration, which is putting downward pressure on wages in Canada and the overall standard of living.
However, the biggest asset to Canada is have the US economy as our major trading partner. The S&P 500's performance in the first quarter of 2024 has been nothing short of stellar, with an impressive 10.6% return. This rally marks the fifth consecutive monthly increase since October, a feat that places it in the 99th percentile of historical market movements. The driving forces behind this bullish momentum include a dovish stance from central banks and the continued expansion of the AI narrative. The S&P 500's performance has been bolstered by strong gains in technology stocks, particularly those related to AI, with companies like NVIDIA and Microsoft leading the charge. This sector's growth has been fueled by a combination of investor optimism and a wave of innovation that promises to redefine the way we live and work.
In addition to the tech sector's dominance, the broader market has benefited from a more accommodating monetary policy environment. Central banks around the world have adopted a more dovish stance, easing fears of aggressive rate hikes and providing a supportive backdrop for equities. This shift has been particularly evident in the United States, where the Federal Reserve has signaled a more cautious approach to future rate adjustments. However, not all sectors have shared equally in the market's gains. The real estate sector, for example, has lagged due to the Fed's "higher for longer" interest rate policy, which has weighed on property values and dampened investor enthusiasm due to higher costs of borrowing.
Looking ahead, market participants are still cautiously optimistic about the prospects for continued growth. Earnings estimates remain steady, with projections for 2025 growth outpacing those of 2024. However, the specter of inflation and the potential for economic slowdown pose significant risks to the ongoing rally.
The outlook for bonds continues to look bright, mainly due to the likelihood that the Fed is closer to the end of its rate hiking cycle, inflation is slowly coming down, and now bonds offer a respectable coupon rate after years of ultra-low interest rates. Bond coupon rates finally provide real competition for investment dollars versus stocks for more conservative income-oriented investors, given the more expensive investment profile of stocks.
Our team's decision to underweight Canadian equity investments and favor US/Global investments has led to higher-than-normal returns throughout Q1. It is important to remember that markets do not always move upward in a straight line and we should expect volatility. Maintaining a long-term outlook on investments will help us navigate these fluctuations and achieve our financial goals.
Lastly, in Q1 Mario Mota and Mark Wiesel from The Steele Group were joined by Greg Valliere, Chief U.S. Policy Strategist, and Jonathan Lo, Vice President of Growth Equities from AGF Investments for a discussion delving into several topics about politics and their potential effects on the economy and investment strategies.
Greg Valliere and Jonathan Lo spoke on an analysis of current political events and potential policy changes, anticipation of the upcoming US elections, the potential influence of a third-party candidate, RFK (Robert F. Kennedy Jr.) and significance of government policies in driving economic growth. Examination of the relationship between market trends and political developments and the impact of AI on current and future market conditions.
This comprehensive conversation aimed to provide a nuanced understanding of the intricate interplay between politics, economy, and investment strategies in today's dynamic landscape. To hear a replay the recorded call can be found on our website: Navigating Economic Growth and Political Uncertainty
In summary, while the first quarter of 2024 has been less pleasant for the domestic market in Canada, it has been a banner period for the S&P 500, with strong gains driven by a combination of accommodative monetary policy and sector-specific growth stories. As we move into the second quarter, investors will be watching closely for signs of economic resilience and further evidence of the AI revolution's transformative impact on the market.
We are here to support you in achieving your financial goals. If you require any assistance or have any questions please do not hesitate to reach out to Cliff, Mario, Mark, or our TSG team.
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