Change Is A-Coming…For Better or For Worse

With over 50 per cent of the world’s population voting in 2024, political turbulence was expected these past twelve months. I don’t think many anticipated just how bumpy things would be.

From Donald Trump’s attempted assassination, to the escalation of wars in Ukraine and the Middle East, to the overthrowing of Bashar al-Assad’s dictatorship in Syria, it was a year of unprecedented political upheaval. Add in Donald Trump’s election victory and aggressive policy promises, plus Prime Minister Justin Trudeau’s resignation announcement this January, and the turbulence looks primed to continue into 2025.

Nonetheless, markets haven’t seemed to mind the instability. Stocks in Canada and the US reached new all-time highs in 2024, with even cryptocurrencies managing to impress; bitcoin’s price briefly surpassed the milestone of $100,000 as enthusiasts celebrated Trump’s pro-crypto positioning. There were certainly bumps along the way, such as the $6.4 trillion market wipeout in September, dubbed “The Great Unwinding” (more below), but with markets North and South of the border both up over 20 per cent for the year, investors are cheery.

As for what drove the enthusiasm, artificial intelligence is naturally a stand out factor, with investors still optimistic the space will drive earnings growth over the next several years. Inflation has also (finally) settled below 3 per cent in Canada and the US, leading both countries to cut rates. Lastly, many are hopeful that Trump will deliver on promised tax cuts and deregulation, seen as a boon for publicly-traded companies.

Those same promises do, however, risk reigniting inflation, with some now calling for a rate pause in the US. Stocks are also priced for perfection - the cyclically-adjusted price-to-earnings (CAPE) ratio, a measure of how “expensive” stocks in the S&P 500 are, is approaching a 24-year high. Canada in particular faces a challenging year; the country continues to deal with sluggish productivity and is in an awkward position for responding to Donald Trump’s tariff threats given Parliament’s prorogue and a likely election in the spring.

Even ignoring the cheeky suggestion from Donald Trump that Canada become the US’ 51st state (among other controversial acquisition aspirations), geopolitical tensions are strained, with tariffs and protectionism seemingly back in fashion. Time will tell if relations normalize after January 20th, or if Canadians will once again need to stock up on domestically-produced French’s ketchup for the coming BBQ season – no harm adjusting your palette in the meantime.

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Equities

In spite of slowing economic growth, Canada’s stock market had a stellar 2024, with the S&P/TSX Composite Index ($TSX) rising 18.0 per cent for the year, 21.7 per cent when including dividends. The performance was broad-based, with almost every sector rising for the year, led by Information Technology (up 37.7 per cent) and Financials (up 25.0 per cent). Canada’s telecommunication companies were the only ones to miss out on the strong rally, with the communication services sector (of which they are the only constituents) being the only area to fall in 2024, dropping 26.5 per cent for the year. The disappointing results reflect Canada’s sharp cuts to immigration targets and increasing price competition in the space.

The United States still managed to edge ahead of Canada’s own strong performance, with the S&P 500 ($SPX) seeing a total return of 25.0 per cent for the year, an amount that jumps to a staggering 36.4 per cent when accounting for the greenback’s appreciation against the Loonie. Ironically, the communication services sector was the strongest performer for our southern neighbours, with the area rising an astonishing 38.9 per cent, driven by, you guessed it, artificial intelligence.

Outside of North America, the MSCI EAFE Index ($MSEAFE) rose 4.4 per cent on a total return USD basis, albeit this figure rises to 13.8 per cent in Canadian dollars. Chinese stocks in particular had a dramatic year, ending with a double-digit gain despite declining most of the year thanks to a slew of stimulus measures aimed at addressing the country’s real estate slump.

Fixed Income and Interest Rates

The Bank of Canada carried out five consecutive interest rate cuts in 2024, bringing its benchmark rate from 5.00 per cent to 3.25 per cent, the lowest it’s been since the pandemic. The cuts, which have been the most aggressive among peers, are nonetheless appropriate – inflation is below 2.0 per cent and the bank is now focusing on stimulating the country’s faltering economy, which has seen GDP growth disappoint (1.0 per cent annualized in the third quarter). The sluggish economy, which has likewise seen unemployment tick higher to 6.7 per cent, also faces the threat of a trade war with the US, the destination for three-quarters of our exports. This dependence makes bargaining difficult, yet a swift resolution to any trade dispute would be mutually-beneficial - 60 per cent and 99 per cent of the US’ natural gas and crude oil imports, respectively, come from the North.

The rate cuts have contributed to a swift flattening of the yield curve in Canada, with short-term yields dropping while longer-term rates proved stubborn. This translated into meagre performance for longer-term bonds, which typically rise in price when rates come down; the Canadian Universe Bond Index rose just 3.6 per cent in 2024.

In the US, the Federal Reserve likewise carried out its first rate cuts in 2024, reducing its target range by a lesser 100 basis points to 4.25 to 4.50 per cent. Economic growth has been more robust for our neighbour, with GDP jumping an annualized 3.1 per cent in the third quarter, and with inflation still resting uncomfortably-close to 3 per cent (last reported as 2.9 per cent). With Donald Trump promising further stimulus, there will be less room than in Canada to bring rates lower.

Currencies

While rate cuts have likely been a welcomed change for debt-ladened homeowners in Canada, they have not been victimless – the Canadian dollar ($CDW) depreciated 8.1 per cent against the US dollar in 2024, ending the year at 69.5 cents USD. The decline reflects the diverging central bank policy rates between the two countries, with the US taking a more cautious approach given its stickier inflation. While the weakening economy surely hasn’t helped our currency, the falling exchange rate does reflect the Greenback’s strength more than it does the Loonie’s weakness - the US Dollar Index (representing its value against a basket of currencies) increased 7.0 per cent in 2024.

Shifting exchange rates had a particularly pronounced impact on markets in 2024 – in September, an unexpected jump in the Japanese yen contributed to a $6.4T sell-off of US stocks. The drop appears to have been partly drive by traders who had borrowed the yen, converted to US dollars, and then invested in the US market (called a “carry trade”) – the strengthening yen forced many of these traders to unwind their positions.

Commodities

Oil prices were flat in 2024, with the West Texas Intermediate ($WTIC) rising in the first quarter of the year before settling lower at $71.72 a barrel, up 0.1 per cent for the year. Oil faces an interesting year ahead – on the one hand, Trump has advocated for more US production, and demand for the commodity may falter with slower economic activity. On the other hand, geopolitical tensions remain elevated (generally a tonic for oil prices), Biden managed to ban offshore drilling permits in the US before exiting office, and countries like China are looking to reignite growth with aggressive stimulus.

2024 was much more directional for the price of gold ($GOLD), which managed to touch $2,800 USD/troy ounce in October before settling at $2,610.90 for the year, a 26.6 per cent increase. 2024 was also a remarkable year for bitcoin, which surpassed a price of $100,000 a coin in November before ending the year just shy of 6 figures. While some view bitcoin as a safe haven competitor to gold, its own rise appears to reflect investor enthusiasm over a more crypto-friendly US administration rather than investor anxiety over the markets – the cryptocurrency surged roughly 40 per cent after Donald Trump’s election.

This report is provided for your information. Conclusions and opinions given do not guarantee future events or performance. Facts and data provided are from sources we believe to be reliable, but we cannot guarantee they are complete or accurate. This report is not to be construed as an offer to sell or a solicitation of an offer to buy any securities. Before making an investment or adopting an investment strategy, each investor should review his investment objectives with their investment advisor. Watson Di Primio Steel (WDS) Investment Management Ltd. and individuals and companies who are related may, at any time, buy or sell securities that are hereby described in this report.