A Closer Look
Here’s a closer look at the factors that were at play for 2024:
Inflation & Monetary Easing: Inflation cooled and allowed central banks to cut interest rates in 2024. The Bank of Canada reduced it policy interest rate 5 times with a total reduction of 1.75%. The Federal Reserve cut rates in the US 3 times with a total reduction of 1.0%. This was a boon to equities. The reduction in rates was a big contributor to the Canadian stock market performance in 2024, with the real estate recovery, boosted business activity, and increased consumer spending.
Technology: The rapid development and integration of artificial intelligence (AI) technologies significantly boosted investor confidence. The top 7 stocks in the S&P 500 (known as the Magnificent 7) were responsible for 55% of the market returns in 2024. If you exclude those 7, the other 493 companies returned a combined 10% in 2024.
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management
Politics: The markets anticipated a very close election in the U.S. with the potential for uncertainty and volatility. When that uncertainty did not materialize and the winner was known on election night, this volatility did not materialize. Not only that, but with Donald Trump’s win, this led to increased market optimism due to the anticipated policies favouring tax cuts and deregulation.
2025 Outlook
One of the analysts we follow closely is Macan Nia at Manulife. He has examined three possible scenarios for 2025 and has assigned a best estimate of the probability of each scenario playing out:
Bear Market (15% Probability)
In the Bear Market scenario, stocks would have a negative year in 2025. In this scenario, we would experience stagflation (a period of slow growth and high unemployment) around the globe. Tariffs would also be broadly-based globally resulting in stickier inflation with rates being paused or even increased.
Bull Market (30% Probability)
In the Bull Market Scenario, there would be global economic growth in 2025 boosted by strong consumer spending in the US and growth in China. Inflation rates would continue to decline and global central banks would continue lowering interest rates. The US would pursue individual and corporate tax cuts and deregulation. Trump’s promise of eliminating federal tax on tips and overtime pay would be implemented and he would take a more targeted approach to tariffs.
Base-Case (55% Probability)
In the Base-Case, the global economic landscape would experience below-trend growth. Consumers are weighed down by high borrowing costs (despite rate cuts), and over in China, stimulus measures are only marginally effective at growing their economy. Global inflation in this base-case continues to ease allowing central banks to continue cutting rates slowly.
The Canadian economy would be expected to face headwinds in this case in light of how sensitive consumers are to interest rates. In the US, financial conditions are neither too tight or too loose with the Federal Reserve slowly lowering rates (and inflation in control). In this scenario, the US would avoid recession. Mass deportation would also not be as broad as anticipated with the Trump administration adopting a more targeted deportation plan. The same would be said for tariffs, which may be broad based at first as a negotiation tactic (similar to his previous administration).
What does the Base-Case mean for Markets?
The base-case is that the U.S. stock market will remain resilient and post positive returns in 2025. However, it’s expected that the broader US market (not the top 7 tech names) will benefit in 2025 with Trump’s focus on the domestic economy. Diversification is key with exposure to value stocks and mid-to-small cap companies (which do business domestically and are less affected by tariffs).
What you shouldn’t do is make drastic decisions on your portfolio allocations based on what you or experts expect to happen. This is a classic investor trap. As an example, when President Biden took office, a lot of people thought he was going to be good for green energy investments and bad for crude oil. The exact opposite happened with green energy underperforming and traditional energy being the performing well. Meanwhile, during Trump’s first term, energy stocks were stagnant even though most people thought he would be a boon for the oil industry.
Looking Ahead
We expect to see more market volatility in the weeks ahead. While it can often be difficult during times like these, staying the course is usually the best solution. We encourage investors to remain disciplined, as in our opinion, the volatility is temporary. If you have any concerns about the market or your portfolio during this time, please reach out to us.
CFP, CIM, FCSI, CHS, RIS
Director, Wealth Planning Services | Caldwell Wealth & Estate Advisory Ltd.
Investment Advisor | Credential Securities
Along with helping people prepare for their financial futures through solid financial planning, Dan curates and manages the investment options for the firm.
Disclaimer
Material in Dan’s articles was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Caldwell Wealth & Estate Advisory to any person to buy or sell any security or adopt any investment approach, and is no indication of trading intent in any fund or account managed by Caldwell Wealth & Estate Advisory. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Caldwell Wealth & Estate Advisory. Past performance does not guarantee future results.
Mutual funds, other securities and securities-related financial planning services are offered through Aviso Wealth, a division of Aviso Financial Inc. The information contained in this report was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This report is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds and other securities.
0 Comments