Daily market snapshot

• NASDAQ leads stocks higher – The TSX and U.S. equity markets closed higher on Friday, as the S&P 500 and NASDAQ broke their losing streak. Sector performance was broad, as consumer discretionary and technology stocks posted the largest gains, reflecting a risk-on tone. In global markets, Asia was down on continued growth concerns in China. Europe was also lower, led by automotive stocks as some electric vehicle (EV) models failed to qualify for U.S. tax credits under new, stricter rules. The U.S. dollar declined versus major currencies. In the commodity space, WTI oil traded higher, while gold was down*.
• Manufacturing reading beats estimates – The Institute for Supply Management (ISM) U.S. Manufacturing Purchasing Managers' Index (PMI) rose to 49.3 in December, above forecasts calling for 48.4*. PMI is a diffusion index, with readings above 50.0 reflecting expansion. While December's figure still shows modest contraction, the trend has improved in recent months, rising from the recent low of 46.5 in October. In addition, services PMI, which represents the majority of the economy, reflects expansion. This is supportive of resilient economic growth and the soft landing narrative, in our view.
• Bond yields mixed – The 10-year Government of Canada was down at 3.20%, while the 10-year U.S. Treasury yield was higher at 4.60%. U.S. yields extended their broader trend higher over the past few months. The U.S. benchmark yield has risen more than 90 basis points (0.9%) from the recent low in September as bond markets** and the Federal Reserve*** have reduced expectations for cuts to the fed funds rate. Markets are now pricing in just one additional Fed interest rate cut in 2025 as disinflation has slowed and labour markets remain resilient. With the BoC policy rate at 3.25%, and the central bank's preferred measures of core CPI around 2.6%, which is within the 1% - 3% target range, we believe there is room to bring rates down to a less restrictive stance, with the rates perhaps settling in the 2.25% to 2.75% range. The Fed funds rate is now around 4.5%, and core personal consumption expenditure (PCE) inflation at about 2.8%, which should allow the Fed to lower rates to 3.5% to 4%. Lower rates should reduce borrowing costs for business and consumers, which is typically favourable for the economy.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **CME Fedwatch ***U.S. Federal Reserve}

• Stocks mixed to start the year – The TSX closed higher, while U.S. equity markets were down on Thursday, reversing gains from earlier in the day. In global markets, Asia was lower on new data for December showing that manufacturing slowed in China. Europe was mostly higher, led by energy stocks. Bond yields were mixed, with the 10-year Government of Canada yield up at 3.23% and the 10-year U.S. Treasury yield down to 4.56%. The U.S. dollar continued its rise versus major currencies. In the commodity space, WTI oil and gold traded higher*.
• Jobless claims tick down: U.S. initial jobless claims dropped to 211,000 this past week, below estimates calling for about 220,000*. Weekly jobless claims averaged about 223,000 over the past month, which is about in line with the weekly average for 2024, indicating that the trend appears to be stable. In addition, continuing claims, which measure the number of people receiving unemployment benefits, declined to 1.84 million, below expectations for 1.89 million. We believe these readings, combined with other recent data, reflect a resilient labour market that is gradually normalizing, as employers appear to be slowly pulling back on hiring but not turning to significant layoffs. With unemployment of 4.2%, well below the long-term average of about 5.7%*, disposable income should be sufficient to support consumer spending. A cooling labour market should also lead to slower wage gains ahead, which typically help ease inflation.
• Manufacturing readings beat estimates – The Markit U.S. Manufacturing Purchasing Managers' Index (PMI) rose to 49.4 in December**, above forecasts and the preliminary reading, both of which were about 48.3*. PMI is a diffusion index, with readings above 50.0 reflecting expansion. While December's figure still shows modest contraction, the trend has improved in recent months, rising from the recent low of 47.3 in September. In addition, services PMI, which represents the majority of the economy, reflects expansion, which is supportive of resilient economic growth and the soft landing narrative, in our view.

Brian Therien, CFA
Investment Strategy

^{Source: *FactSet **S&P Global}

• Stocks finish mixed on final trading day of 2024: North American equity markets were mixed on Tuesday with the TSX gaining 0.4% while the S&P 500 fell by 0.4%.* From a leadership standpoint, energy was the top performing sector of the S&P 500, supported by a spike in oil prices, while growth sectors such as technology and consumer discretionary were among the laggards.* Despite volatility in the final trading days of the year, the TSX gained 18% in 2024 while the S&P 500 gained 23%, marking the second consecutive year with a 20% or more return.* Overseas, Asian markets were mostly lower overnight while European markets traded higher. U.S. bond yields ticked higher with the 10-year U.S. Treasury yield rising to 4.57% while the 10-year GoC yield ticked lower to 3.23%%.* In the commodity space, oil prices rose by over 1% while gold finished higher by 0.8%.*
• Bonds deliver positive returns in 2024: Canadian investment-grade bonds are on pace for another year of positive returns in 2024, with the Bloomberg Canada Aggregate Index higher by 3.8% through yesterday's close.** This year's return follows a healthy 6.5% return in 2023, however the index remains roughly 5% below its all-time high achieved in August 2020.* In our view, elevated yields relative to history should lead to healthy returns from investment-grade bonds in the years ahead. Looking around the horn, international bonds are set for 2.4% gain in 2024 while cash is on pace to close higher by 4.9%.** Lower-quality issuers have been the top performers in 2024, international high-yield bonds higher by 19.2%, as healthy economic trends have supported lower quality issuers, particularly in the U.S.**
• U.S. housing price data in focus: U.S. housing-market data was back in focus on Tuesday with a read on home price trends in October. The S&P/Case-Shiller National Home Price Index rose by 0.3% in October and 3.6% on an annual basis.* The FHFA Home Price Index rose by 0.4% in October and 4.5% on an annual basis.* Despite higher borrowing costs, home prices have proven resilient with both the S&P/Case-Shiller and FHFA Indexes at all-time highs. In our view, this has been in part due to low inventory levels of existing homes for sale as U.S. homeowners have been reluctant to sell their homes and forfeit a mortgage rate which was locked in prior to 2022. Additionally, healthy labour-market conditions and strong household balance sheets have likely helped put a floor on housing demand over the past two years, supporting prices. We'd expect U.S. home prices to continue to rise at a pace roughly consistent with wage growth over the coming years, perhaps in the 3%-4% range.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **Morningstar Direct, Total return in CAD through 12/30/2024.}

Monday, 12/30/2024 p.m.

• Stocks slide to start the week: Equity markets closed lower on Monday, with the TSX shedding 0.6% and the S&P 500 finishing down 1.1%.* Today's move follows a risk-off trading session on Friday, when both the S&P 500 and Nasdaq fell by over 1%. Today's move lower was broad-based, with all 11 sectors of the S&P 500 finishing the day in negative territory.* With no key corporate or economic news out over the past two trading sessions, we'd chalk up the risk-off move in markets to profit-taking and rebalancing from investors after what's been another strong year of equity-market performance. Overseas, Asian markets were mixed overnight, while European markets traded mostly lower. Bond yields finished the day lower, with the 10-year U.S. Treasury yield falling to around the 4.54% mark, while the 10-year GoC yield declining to 3.25%.*
• U.S. equities led the way in 2024: It’s been another strong year of equity-market performance in U.S. stocks, with the S&P 500 higher by nearly 27%, including dividends, through Friday's close in U.S. dollar terms.* With the U.S. dollar appreciating sharply versus the Canadian dollar this year, the S&P 500 has gained 38% in Canadian-dollar terms.** Domestic equity markets have seen healthy returns as well, with the TSX higher by roughly 22%.** Overseas equity markets have struggled to keep pace, with the MSCI EAFE Index (which measures developed overseas large-cap stocks) up by roughly 15%, while the MSCI EM Index (which measures emerging-market stocks) has gained roughly 19%.** Strong economic momentum and corporate profit growth in the U.S. has supported the year-to-date outperformance in U.S. stocks. Additionally, a stronger U.S. dollar, particularly in the past few months, has provided a boost to U.S. equity-market performance in Canadian-dollar terms. As part of our opportunistic allocation guidance, we favour U.S. stocks over overseas developed stocks and Canadian large-cap stocks, and we believe 2025 will bring another year of U.S. outperformance.
• U.S. housing-market data in focus: Today provided a look into trends in the U.S. housing market, with pending home sales for November. Pending home sales measure housing activity based on real estate contracts for existing single-family homes, condos and co-ops and can serve as a leading indicator for existing home sales.* The pending home sales index rose to 79 in November, better than expectations and the highest reading since February 2023.* However, the index remains well below the long-run average of roughly 102.* Elevated interest rates have weighed on housing-market activity over the past two years. Higher interest rates not only make the cost of financing a new home more expensive due to higher interest payments, but also make it less attractive for existing homeowners to sell their homes and forfeit a lower interest rate on their existing mortgage if it was originated prior to 2022. The U.S. mortgage market differs from Canada in that most mortgages in the U.S. have 30-year fixed-rate terms. As the Fed continues to normalize policy, we expect that housing-market activity should improve over the coming year.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **FactSet, Total return in CAD through 12/27/2024.}

• Stocks finish lower: North American equity markets closed lower on Friday with weakness in U.S. mega-cap technology stocks weighing on performance. The TSX finished lower by 0.4% while the tech-heavy NASDAQ declined by 1.5%.* U.S. small-cap stocks were under pressure today as well with the Russell 2000 declining by over 1.5%.* With no major corporate or economic news out today, we'd attribute the risk-off move to profit taking after what's been a strong year of stock market performance. Asian markets were mixed overnight with Japan's Nikkei logging a 1.8% gain while markets in China were flat. U.S. bond yields finished higher with the 10-year Treasury yield closing above the 4.6% mark while the 10-year GoC yield was little changed at 3.3%.
• U.S. bond yields holding near highs for the year: The 10-year U.S. Treasury yield rose again on Friday, finishing above the 4.6% mark. Since the Fed delivered a 0.5% interest-rate cut on September 18, the 10-year yield has risen by nearly 1%.* Domestic bond yields have risen as well with the 10-year GoC yield rising from 2.89% on September 18 to roughly 3.3% today.* Healthy U.S. economic data and uncertainty around U.S. inflation have accompanied the move higher in yields.* In response, performance of U.S. investment-grade bonds has been lackluster. Through September 18, the year-to-date return of the Bloomberg U.S. Aggregate Bond Index was 4.7%.* With yields spiking, the index has given back most of its prior gain, and is now up only 1.2% year-to-date.* Canadian investment-grade bonds have fared better with the Bloomberg Canada Aggregate Bond Index holding on to a 3.3% gain year to date.* Looking ahead, we expect the 10-year GoC yield to spend most of 2025 in the 2.75% - 3.25% range and the 10-year U.S. Treasury yield to hover between 4% - 4.5%.
• Performance check-in; Growth sectors in the lead: It's been another strong year of performance for North American equity markets with the TSX higher by 22% S&P 500 higher by over 28% including dividends through yesterday's close.** At a sector level, it's been familiar faces driving the gains for the S&P 500. Communication services and information technology have been the top performing sectors in 2024, each higher by over 40%.** Consumer discretionary has been the next best performer, gaining 36%.* These three sectors were the top performers of the S&P 500 in 2023 as well. Similarly, technology has been the top performing sector of the TSX, gaining over 40% year-to-date.** Enthusiasm around the growth potential of AI and robust corporate profit growth has led to strong performance in U.S. mega-cap tech stocks over the past two years. While we acknowledge there are reasons for optimism in this area of the market, we believe market leadership could broaden in 2025 beyond mega-cap tech stocks. In particular, profit growth in value-style stocks is expected to accelerate in 2025 after a period of lackluster growth. In our view, this creates a favourable backdrop for broad participation in equity markets over the coming year, potentially rewarding those with well-balanced portfolios.

Brock Weimer, CFA
Investment Strategy

^{Source: *FactSet **FactSet. GICS sectors of the S&P/TSX Composite and S&P 500. Total return in local currency through 12/26/2024.}