Your Financial Review of July 2024
A Second Quarter of Contrasts
Global markets continue to be shaped by inflationary dynamics and rate cut expectations. Central banks closely monitor inflation and economic indicators to determine when to ease monetary policies.
The Bank of Canada led its G7 counterparts by initiating monetary policy easing, reducing its overnight rate from 5% to 4.75%. As core inflation continues to decline, the Governing Council is optimistic that this trend will continue until the 2% target is reached. However, the Canadian economy is showing signs of weakness, with a decrease in GDP per capita of 3.5% and an increase in unemployment of 1.4 percentage points. The Bank of Canada will therefore have to find a balance to control inflation while guiding the economy towards a soft landing.
The American economy is more robust than in Canada, but certain signs of weakness seem to be starting to appear. The Bloomberg Economic Surprise Index turned negative for the first time since 2019, signalling economic performance below expectations. Employment trends show a decline in full-time employment for the fifth time in six months, reflecting a weakening labour market. At the same time, consumer spending is declining, leading to an increase in loan defaults.
For the moment, investors still seem convinced of the soft-landing scenario put forward by the American Federal Reserve. They now expect just one rate cut by the end of the year and four more in 2025.
Market review as of June 30, 2024
Fixed Income
- The Canadian fixed income universe posted gains for a second consecutive month in the context of a slowdown in inflation which allowed a first reduction in the key rate by the Bank of Canada at the beginning of June. However, the asset class underperformed cash, both during the quarter and since the start of the year.
- During the first half of the year, the Canadian bond universe (FTSE Canadian Bond Universe) posted a decline of 0.37%.
Equities
- A new month, and a new all-time high for U.S. Equities, which celebrated the arrival of a near perfect inflation report. The S&P 5001 returned 4.7% in the second quarter of 2024. The flagship American index now displays a year-to-date performance of 15.8% as of June 28.
- Within the S&P 500, the sector performance gap was particularly marked in Q2-2024. Indeed, it was the sectors of the technological giants (Technology and Communication Services) which drove the index upwards, while the other sectors were either relatively unchanged or in negative territory.
- In Canada, the energy and materials sectors are responsible for most of the performance of the S&P/TSX2. Despite everything, Canadian stocks held up in Q2-2024, posting a return of 6.2% since the start of the year, thus outperforming international stocks (MSCI EAFE1,3) which posted a return of 5.7% over the same period.
Oil & Gold
- After a significant rally in May, gold remained stable in June. The price of an ounce of gold1 has appreciated by 12.8% since the start of the year.
- Oil saw a monthly increase of more than 6% in June, but still ended the quarter slightly down. Nevertheless, the price of a barrel of oil (WTI1,4) shows growth of 15.5% compared to its level on December 31, 2023.
Currencies
- Although currencies have remained fairly stable since the start of the year, the US dollar has appreciated slightly against the Canadian dollar. The CAD per USD pair appreciated by 1.2% in the second quarter, now showing an advance of 3.4% compared to the start of the year.
- The interest rate gap between the United States and Canada widened during the month of June, as the Bank of Canada began a new cycle of rate cuts, unlike the Federal Reserve. This gap weighed on the CAD/USD pair.
1. S&P500, MSCI EAFE, gold and WTI returns are expressed in US currency.
2. The S&P/TSX Index is the primary Canadian stock index measuring the performance of the Toronto Stock Exchange.
3. The MSCI EAFE Index is an equity index designed to measure the performance of equity markets in developed economies other than the United States and Canada.
4. West Texas Intermediate (WTI) Crude oil is the North American standard for pricing oil.
Investment Outlook
In the short term, the gradual slowdown in inflation and the economy should further support the soft-landing thesis by opening the door to a first rate cut from the Fed by November. However, we will have to keep an eye on the job market and the state of consumers, these two parts of the economy having started to show signs of exhaustion, whether through the reduction in hiring intentions of SMEs or even the disappearance of excess savings; a scenario that is still positive for bonds, but less so for stocks.
Against this backdrop, we have maintained a neutral positioning within the asset allocation, with the potential for gains appearing relatively balanced between stocks and bonds given the optimism generated by the start of rate cuts. Geographically within equities, EAFE is still underweight compared to Canadian and US equities being better aligned to perform in the current market environment.
If you have any questions or need to discuss your portfolio, please do not hesitate to contact us. We are here to help you navigate this complex and uncertain economic environment.
Sincerely,
Cathy, Guillaume, Marc-Antoine and Inuk
514-871-3474