As we enter the final stretch of 2024, we would like to take a moment to share with you our outlook on market developments and key economic trends shaping this year. Between geopolitical tensions, monetary policy adjustments, and fluctuating economic data, the current environment remains dynamic. While these factors present certain challenges, they also create opportunities that we aim to explore with you.
Below is our analysis of the key factors that will influence investment decisions for the remainder of the year. As always, we are available to discuss the specific implications for your portfolios and guide you through this transition period.
Geopolitical Conflicts: Israel-Palestine and Ukraine-Russia
The ongoing conflicts in Israel-Palestine and Ukraine continue to weigh heavily on the global economy. The recent escalation of tensions in the Middle East has driven energy prices higher, exerting additional inflationary pressure, particularly in Europe and Asia, which are heavily dependent on oil and gas imports. This rise in energy prices complicates efforts to curb inflation in several countries, increasing costs for both consumers and businesses.
Simultaneously, the war in Ukraine continues to disrupt supply chains, especially in the agricultural and energy sectors. Sanctions against Russia maintain economic pressure on Europe, contributing to high energy costs and slowing economic recovery. These geopolitical events have triggered increased volatility in financial markets, particularly in energy and commodity sectors, making caution crucial for investors.
Monetary Policy: Toward Easing in Canada and the U.S.?
In 2024, the monetary policies of both Canada and the U.S. have reached a turning point. In Canada, the Bank of Canada has implemented three consecutive rate cuts of 25 basis points, bringing its benchmark rate down from 5% to 4.25% by September 2024. These reductions follow a slowdown in inflation, which fell to 2.5% in July. The Bank justified these cuts by citing easing inflationary pressures, although certain price increases persist, particularly in housing and services. However, the Bank has indicated that it remains vigilant and that further cuts may occur if the economy shows more pronounced signs of weakness.
In the U.S., the Federal Reserve also initiated a monetary easing in September 2024, with its first rate cut since 2020. The benchmark rate was lowered by 50 basis points, bringing it to a range of 4.75% to 5%. This decision comes after a steady decline in U.S. inflation, which has eased since the peaks reached in 2022. Additional cuts are anticipated before the end of the year, as the Fed assesses the effects of previous rate hikes on the economy and labor market.
For investors, these rate cuts offer opportunities in interest rate-sensitive sectors such as real estate, financial services, and consumer discretionary, which have been heavily impacted by high rates in recent years. However, caution is warranted as central banks will continue to closely monitor economic indicators to adjust their policies based on inflation and growth developments.
Inflation and Labor Market: Trends to Watch
In Canada, inflation has slowed to 3.5% year-over-year, but food and housing prices continue to rise significantly, straining consumer purchasing power. In the U.S., while overall inflation has also decelerated, it remains well above the Fed's 2% target. Core inflation, particularly in services, remains problematic due to wage pressures, delaying a return to lower inflation levels.
On the labor market front, the situation remains relatively stable on both sides of the border. In Canada, the unemployment rate remains at 5.5%, while in the U.S., it holds at a low 3.8%. However, signs of a slowdown are emerging in sectors such as technology and manufacturing. A softening labor market could provide central banks with additional leeway to cut rates, facilitating a broader recovery.
Stock Markets: Outlook for Year-End
North American stock markets could benefit from the monetary easing initiated in Canada and the U.S. In Canada, the successive rate cuts to 4.25% offer some relief to interest-sensitive sectors, particularly real estate and financial services, which had suffered from high rates. The S&P/TSX, supported by the strong performance of natural resources, is expected to benefit from lower borrowing costs, while industrial and consumer sectors may also see a rebound as demand stabilizes.
In the U.S., the Fed’s first rate cut to 4.75%-5% bolsters optimism. However, uncertainty remains, particularly in the technology sector, where high valuations could trigger a correction if earnings growth does not keep pace. Sectors such as consumer discretionary and real estate, which have been particularly affected by high borrowing costs, should benefit directly from the easing.
The U.S. elections and geopolitical tensions, particularly in the Middle East and Ukraine, add additional volatility, especially in the energy and commodity sectors.
U.S. Elections: What Impact on the Economy?
The 2024 U.S. elections represent a major issue for financial markets. A Republican victory could result in business-friendly policies, such as tax cuts and increased deregulation, benefiting sectors like fossil fuels and financial services. On the other hand, a Democratic win could extend existing initiatives focused on green infrastructure, renewable energy, and public health, while maintaining stricter regulation in traditional sectors.
For investors, the uncertainty surrounding the elections calls for a flexible and well-diversified strategy. Economic impacts will vary depending on the election outcome, and rapid portfolio adjustments may be necessary to seize new opportunities or mitigate risks.
Monetary Policy in Japan: A Gentle Shift
The Bank of Japan continues to maintain an ultra-accommodative monetary policy despite a slight rise in inflation beyond its forecasts. However, recent adjustments signal a slow transition toward normalization, although this remains uncertain in the medium term. Japan remains dependent on domestic demand and exports, particularly to China and the U.S., and any drastic change could disrupt this dynamic.
Japan’s industrial and export sectors present attractive opportunities for investors, supported by a relatively weak yen and a monetary policy still favorable to exports. However, any acceleration in monetary tightening in Japan or abroad could slow this trend.
Investment Opportunities: Undervalued Sectors
Despite global uncertainty, several sectors of the S&P500 and S&P TSX appear undervalued. In the U.S., telecommunications and consumer staples offer relatively attractive price-to-earnings ratios compared to their historical averages. These sectors, having faced pressure from inflation and rising costs, could rebound if macroeconomic conditions improve and inflation continues to ease.
In Canada, the industrial and financial services sectors, which have been hit by rising interest rates and weak domestic demand, also seem promising. A stabilization of the Canadian economy and further rate cuts in 2025 could create a favorable environment for a rebound in these segments.
Conclusion
Dear clients, as we approach the end of 2024, the economic environment remains complex and evolving. However, this transition period also offers great opportunities. Caution remains necessary, particularly due to geopolitical and electoral uncertainties, but a well-diversified strategy tailored to current data will help navigate this context.
We recommend staying vigilant regarding undervalued sectors while monitoring the anticipated rate cuts, which could create new market dynamics in 2025. Please do not hesitate to contact us to discuss your portfolios and adjust your strategies according to your long-term goals.
We remain here to support you in your financial decisions and help you navigate this period with confidence.
The particulars contained herein were obtained from sources we believe to be reliable, but are not guaranteed by us and may be incomplete. The opinions expressed are based upon our analysis and interpretation of these particulars and are not to be construed as a solicitation or offer to buy or sell the securities mentioned herein. The opinions expressed do not necessarily reflect those of NBF. I have prepared this report to the best of my judgment and professional experience to give you my thoughts on various financial aspects and considerations. The securities or sectors mentioned in this letter are not suitable for all types of investors and should not be considered as recommendations. Please consult your investment advisor to verify whether the security or sector is suitable for you and to obtain complete information, including the main risk factors. Some of the securities or sectors mentioned may not be followed by the analysts of NBF.
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