Canadian Market Compass video series

Hello, everyone, and welcome to the first Market Compass of 2025.

It has certainly been an eventful couple of months to start the year, but despite some volatility and uncertainty, markets have performed well with the TSX and the S&P 500 both up over 4% as of mid-February.

Underneath the surface, we have seen a broadening of market leadership beyond U.S. mega-cap technology. We believe the positive market returns we've seen so far in 2025 reflect an economy that continues to remain resilient and is showing signs of momentum. The uncertainty around tariffs remains an overhang and could be a source of volatility, inflation and lower than expected economic growth.

However, barring a recession or central bank rate hikes — neither of which we see ahead — we continue to see market pullbacks as opportunities to diversify, rebalance and add quality investments.

Let’s first look at the Canadian stock market. The TSX is up over 4% on the year, being led by cyclical sectors such as technology, materials and industrials which do well when the Canadian economy is growing.  

Similarly, in the U.S., the S&P 500 is up about 4% as of Feb. 13, and sector leadership has broadened. The technology and consumer discretionary sectors have lagged thus far this year after being some of the strongest sectors in 2024, with some U.S. mega-cap tech names underperforming. We believe this theme of diversification and broad leadership will continue in the year ahead.

In the bond market, yields have been trending down on tariff concerns and more aggressive bank of Canada easing. The Bank of Canada has reduced its policy rate by 2% from June 2024 compared to the Federal Reserve's 1% decrease. As a result, U.S. 10-year treasury rate is yielding over 1.30% above the Canada 10-year rate.

U.S. treasury yields have come down from their highs but remain elevated versus recent history as inflation remains sticky and above the Federal Reserve's target of 2%.

Given the uncertainty around inflation and tariffs, Canadians yields have moved lower due to the expectation of more bank of Canada rate cuts to support the economy. In the U.S., yields have moved higher, because the tariffs are seen as inflationary and the markets have priced in fewer Federal Reserve interest rate cuts. Higher yields generally mean lower bond prices, but for savers, long-term investors and those nearing retirement, elevated bond yields can be a good source of income. We continue to see opportunities in the U.S. investment-grade market to extend duration and invest in high-quality bonds and to take advantage of higher U.S. bond yields.

After two years of double-digit returns in Canada and the U.S. stock markets, what is driving the continued positive returns this year? In our view, the fundamental backdrop remains supportive, which underpins this bull market.

Corporate earnings continue to deliver: We see them growing by double digits this year as well, driven by contributions from both growth and value sectors, which should support stock market returns.

The labour market has been an ongoing source of strength for the U.S. economy. Keep in mind that when households feel confident in their jobs and the job market broadly, they are more inclined to consume. The U.S. unemployment rate remains at 4%, well below the long-term average of 5.7%, and wage growth, while elevated at about 4%, continues to outpace the rate of inflation. This means employees are bringing home positive real wages, also good for households and consumers.

I'll now pass things to Julie Petrera.

Thank you, Mona.

Perhaps the biggest source of uncertainty for markets, and the most significant risk to economic growth is the tariff and trade policy. An escalation in tariffs on one or more economies would not only weigh on consumer and market sentiment, but could also increase prices and put downward pressure on economic growth.

The Bank of Canada expects a 2.5% reduction in GDP if the U.S. implements a 25% tariff on Canadian goods. This would likely lead to a mild recession in Canada.

However, we do see some mitigating factors when it comes to tariffs and trade. We’ll highlight three today:

1. First. The possibility of U.S. tariffs may be more targeted. Rather than across-the-board tariffs of 25% on all imported goods, The U.S. may take a more targeted approach as seen by the 10% tariff proposed on energy.
2. Next - The decline in the Canadian dollar. The Canadian dollar has seen a decline of 5% since October, dropping to a low of sixty eight and seven tenths of a cent due to tariff threats. If the 25% tariffs are imposed broadly, we could see the Canadian dollar drop further, which would help to offset some of the potential impact.
3. And finally, the potential of fiscal stimulus. The current Canadian government has previously alluded to the fact that stimulus could be provided to impacted sectors of the economy as well as consumers to help withstand the impacts of tariffs.

So, while the Bank of Canada forecast of a 2.5% reduction in GDP may be in the realm of possibilities, it's also plausible that we don’t see the full impact due to these mitigating factors.

Overall, after two years of solid gains in stock markets, and low volatility during this period, we expect to see moderation in returns and increased market volatility ahead. However, we continue to see positive economic and earnings growth.

And while tariffs and trade remain uncertain, we don’t see them pushing the economy into a prolonged recession. Thus, we believe investors can use market pullbacks as opportunities to diversify, rebalance and add quality investments at better prices across stock and bond markets.

In our view, diversification will be a key theme in the year ahead. By spreading your portfolio across a variety of asset classes, you can help avoid too much exposure to those that may be underperforming while potentially taking advantage of others that might be outperforming.

If you are concerned about the impact of tariffs to your personal household expenses, or if you work in an industry that you worry may be impacted - connect with your Edward Jones Advisor to ensure you’ve accounted for price increases in your budget and that your emergency fund reflects any risk of a job disruption.

Additionally, if the thought of market volatility keeps you up at night, speak to your advisor about reviewing your risk tolerance to ensure your investment strategy appropriately reflects your comfort with risk. An appropriately specified risk tolerance is one that is designed to balance your ability and willingness to take on risk while helping you earn a rate of return that high enough to meet all of your financial goals.

And with that, I thank you, and we’ll see you here next time on the Market Compass.

Hello everyone, and welcome to the third quarter Market Compass!

This has been a big quarter for the markets and economy — perhaps even a historic one. The Bank of Canada has cut interest rates by a quarter percent three times so far this year, with two of those cuts in Q3. And the Federal Reserve finally began its rate-cutting cycle too, lowering interest rates in September for the first time since March 2020.

The Bank of Canada acted first by reducing the overnight rates at its June 5th meeting by 0.25% followed by two additional 0.25% cuts in consecutive meetings. The 0.75% total reduction has taken rates down to 4.25% and makes the BoC the leader among G10 central banks so far this cycle. In the U.S., the Fed cut the federal funds rates by 0.5% at its September 18th meeting and indicated it likely has begun a multiyear rate-cutting cycle that could bring policy rates close to 3%.

What do central bank rate-cutting cycles mean for markets and the economy? We discuss the implications on the broader economy, stock markets and bond markets in this quarter’s Market Compass. Watch the full episode at EdwardJones.ca!

At the September Federal Open Market Committee meeting, the Fed took the first step to move interest rates lower, in large part because both sides of its dual mandate — inflation and the labor market — are now in focus. Federal Reserve Chair, Jerome Powell, indicated the Fed has more confidence that inflation is moving in the right direction, but the labor market has shown clear signs of cooling. While it doesn’t see an outright downturn or recession on the horizon, the Fed now prefers to support the economy and labor market with less restrictive interest rates. Like the Fed, the BoC has also shifted its focus to the softening labour market.

So, what is the path of policy rates from here? The Fed also released what’s known as the “dot plot,” a best guess from all its voting members on the path of the fed funds rate going forward.

This dot plot indicates that most members of the FOMC see interest rates heading toward 3% by the end of 2026, or another nearly 2 percentage points lower from here.

We mentioned earlier how the Fed is not the only major central bank cutting interest rates. The Bank of Canada has led the way and been followed by other central banks around the world — including the European Central Bank, and the Bank of England. Perhaps the only major central bank raising rates this year is the Bank of Japan, as they seek to break their decades-long cycle of deflation and weak growth.

Lower interest rates globally do have an impact to economic growth and consumption. On one hand, we know that lower rates can support economic growth. They bring down borrowing costs for consumers in areas such as mortgages, credit cards and auto loans.

Similarly for corporations, the cost of borrowing is lower to spend on projects or invest in growing the business. These lower rates can help support consumption and economic growth broadly.

On the other hand, for savers, lower rates mean the interest paid on savings accounts is lower. For investors with outsized positions in cash, or cash-like instruments such as GICs or money market funds, now may be a good time to start thinking about gradually investing these cash-like positions in more traditional asset classes such as stocks and bonds.

Speaking of stocks and bonds, how should we think about these investments now that the Fed has begun to cut interest rates? With stocks, there are three takeaways:

1. First, history tells us that if the Fed is cutting rates and the economy is not falling into an imminent recession, stocks are well-supported. We can see that this chart. If, however, the economy is in a recession, stock markets tend to sell off after the Fed cuts rates.
   In the current environment, we believe the most likely outcome is that economic growth cools but does not fall into negative growth or recession. Thus, while markets may not move in a straight line higher from here, we believe the underpinnings of the bull market expansion are intact for now.
2. Second, when the Fed starts cutting rates, market valuations tend to be supported. We see valuation metrics such as price-to-earnings multiples expand. Market returns are driven by earnings growth and valuation expansion, both of which may move higher as the Fed cuts rates.
3. And finally, some asset classes and sectors tend to perform well when the Fed starts cutting rates and there is no recession. Historically, equities do well in this backdrop, as do bonds, each of which are supported by lower rates.
   From a sector perspective, cyclical parts of the market such as financials and industrials, as well as some defensive areas such as health care and utilities, can do well alongside technology and growth markets. For this cycle, we believe those sectors that have the most scope for valuation expansion, including cyclical and defensive sectors, may play catch-up as the Fed cuts rates.

Now over to Julie for our perspective on what this means for you.

Central bank rate cuts lead to reductions in interest paid to investors on cash and cash-like products. If you have been holding cash and collecting interest – consider if this is consistent with your long-term strategy. Our guidance is to keep 3-6 months’ worth of total expenses available in case of emergency but holding cash in excess of that may not support your longer-term financial goals. We have also seen rates on high yield savings accounts decline- this year, making holding cash less attractive relative to other areas of the market.

Another thing to note is if you have GICs maturing, the reinvestment rates may be lower than when you originally bought them. Again, look at how GICs fit into your long-term portfolio and determine if they should be re-invested elsewhere at maturity.

We believe central bank rate cuts should be a positive for financial markets, especially if the economy avoids a recession. Over time, lower rates, easing inflation and an economy that is cooling but still growing should support the bull market and the ongoing broadening of market leadership.

Lastly, keep in mind that stocks have already had a nice run this year, with the S&P 500 up nearly 18% and the TSX up over 15%. As we head toward U.S. Election Day on November 5th - we may face bouts of volatility, which are normal in any given year, but expected leading up to an election – even one south of the boarder.

If you’re looking to reposition cash, market corrections could present opportunities to add quality investments at lower prices, or rebalance existing holdings to ensure you’re properly diversified. Consider U.S. mid- and large-cap stocks, growth and value sectors, and domestic investment-grade bonds. At the end of the day, diversification remains a cornerstone for investment portfolios — and especially so as central banks cut rates.

And with that, I thank you for your time. We’ll see you next quarter on the Market Compass!

It’s time for Edward Jones’ midyear check on the markets. Senior Strategist Mona Mahajan looks at market performance to date and outlines three key factors we’re watching for the rest of 2024: Inflation and central bank policy, corporate earnings growth and the U.S. presidential election.

Hello, everyone, and welcome to the June Market Compass. Now, it's hard to believe we've almost reached the midpoint of 2024, and we certainly hope everyone is enjoying the warmer weather, longer days, and perhaps some well-earned downtime in the weeks ahead. Now, mid-year is also a good time to do a little reflection on where we've been thus far and what we're watching going forward. 

So today, I'll go through a market scorecard to check in on what markets have been doing and any key trends we are seeing. Then I'll highlight three key factors we're watching in the second half of 2024 that we believe will be the drivers of markets and the economy. These are inflation and central bank policy, corporate earnings growth, and the US presidential elections. 

So how have markets done so far in 2024? Now, overall, it was a strong start to the year, more so in the US than in Canada. If we look at this chart on annual returns for the S&P 500, the TSX and the Canadian Aggregate Bond Index, we can see that after a strong year in 2023, with the S&P 500 total return up over 26%, stocks continue to perform well in 2024. 

In fact, the S&P 500 total return is up over 15% as of mid-June. However, the bond market has lagged and is only slightly positive for the year. This is in part because interest rates have remained high. And while the Bank of Canada cut interest rates earlier this month, the Federal Reserve in the US has not. And this has put downward pressure on bond prices in both countries. 

Now looking across a broader set of indexes and asset classes, we notice a couple of interesting trends. The momentum in the market continues to be driven by areas like artificial intelligence and technology, with the Magnificent Seven cohort and the tech-heavy NASDAQ leading the way higher again this year. This has also supported S&P 500 returns, which have about a 50% weight to technology and growth sectors. 

Now, as we move right on this chart, we can see lower returns in areas with less exposure to technology and growth, with more modest increases in the 4% to 6% range. And the areas that are lagging so far this year are the more interest rate sensitive parts of the market, including mid-caps and bonds. 

Now, as we head into the second half of the year, one theme that we continue to monitor is the path of inflation and the Bank of Canada and the Federal Reserve. The Bank of Canada cut the key lending rate by 1/4% to 4.75% in June. This was the first reduction in four years and the first cut by a G7 central bank this cycle. 

Now, this comes not only as Canada's inflation rate has moderated at a better pace than the US, but the economy's growth rate has also softened. Now, while the magnitude of the cut may seem marginal, it is significant as it marks the official turning point after more than two years of restrictive policy. We expect the Bank of Canada to embark on a gradual rate-cutting cycle alongside the Fed with potentially one or two more rate cuts in 2024. 

While US inflation has remained higher than expected during the first few months of 2024, more recently, we're seeing inflation come in cooler than expected and the disinflation trend gradually resume. Now, in our view, while we may not get a straight line lower, there are catalysts that may move inflation rates closer to the Fed's 2% target. These include shelter and rent components of core CPI that may move lower as they play catch up to real-time data and a potential softening in wage gains that should lead to easing services inflation. Better inflation data would, of course, give the Fed more confidence in embarking on a rate-cutting cycle. 

Now, at the June Fed meeting, the updated survey of Fed officials suggested a single rate cut in 2024, although still indicated a multi-year rate-cutting path ahead. Now, in our view, if we do get two or three more months of lower inflation or the labor market and wage growth softens more than expected, we could see up to two rate cuts this year. Now, more broadly, we believe the Fed is poised to gradually bring rates down to a more neutral level in the one to three years ahead. And if they can do that without a significant deceleration in the economy, then both stocks and bonds should be well supported. 

Another key element we're watching in the second half of 2024 is earnings growth. We know that stock markets are underpinned by earnings growth, perhaps more so than any other factor. Now, the good news is that the TSX and S&P 500 earnings growth is expected to move higher after mixed results last year. 

TSX earnings growth for 2024 is forecast to come in at a modest 5% versus 2023, where we saw a year of -9% growth. In the US, the S&P 500 is expected to have earnings growth of 13% versus -1% in 2023. Now, while last year's stock market returns were driven in large part by valuation expansion, particularly in tech and growth parts of the market, this year, markets may be more supported by earnings growth as well. 

Now, also of note, in the first half of 2024, earnings growth for the S&P 500 companies was largely driven by AI, tech, and growth sectors of the market. However, as we head to the third and fourth quarter of 2024, we would expect to see a broader set of sectors contribute to earnings growth, which may also lead to a broadening of market leadership. 

Finally, perhaps one of the more anticipated events of the second half of 2024 is the US presidential election, which will occur on Tuesday, November 5. Now, while it's still early days, and we'll continue to hear more specifics on US policy agendas in the months ahead, for now, we can review the impacts of previous elections on Canadian and US markets. For example, since 1977, in a four-year election cycle, year 3 tends to be the best year for US markets, and perhaps we saw that last year. Now, notably year 4, the year we're in now, tends to be third-best, perhaps as some uncertainty is lifted. 

In addition, while we do tend to see volatility in the six to eight weeks leading up to US election day, in the weeks following the election, market returns tend to rise regardless of the party in office. Now over to Julie for our perspective on what this means for you. 

Thank you, Mona. So far, the S&P 500 is up over 13% this year and continues to be led by the Magnificent Seven. The TSX is up over 3% with equities outperforming bonds in both countries. This speaks to the importance of diversification across asset classes, sectors, and regions. 

Another headline was the Bank of Canada cutting interest rates ahead of any other G7 country. This means interest-bearing investments in Canada may decline, and the cost of debt will likely be reduced. What exactly that means to you depends on your goals and your relationship with risk, the type of debt you have, and the amount of debt you hold relative to your income.

And as we head into the second half of the year, expect some noise and potential volatility in the markets as we move through the US election. As we saw, the impact to both US and Canadian markets has historically been positive in the US election year. Elections are part of a regular business cycle. So speak to your Edward Jones financial advisor to determine if any of this has an impact on your individual financial strategy. 

And with that, I thank you, and I look forward to a fantastic second half of 2024. See you next quarter on "The Market Compass." 

Hello everyone, and welcome to the first edition of the Market Compass! In today's episode, we'll discuss a theme that we highlighted in our 2024 Annual Outlook: The broadening of market leadership. We know that stock market returns in 2023 were very narrow – led primarily by U.S. mega-cap technology and a handful of U.S. companies known as the Magnificent Seven. So nearly three months into 2024, where do we stand now? Markets have certainly moved higher, with the S&P 500 up nearly 8% this year and the TSX up about 4% as of mid-March, but has market leadership expanded beyond the Mag 7? And how does the Mag 7 impact Canadian investors? And if leadership is broadened, how are the Canadian equity markets impacted? We'll go through this and more in today's episode, which can be found on EdwardJones.ca.

2024 thus far, starting to see some broadening of participation:

In 2023, we know that stock markets were led by a pretty narrow group of U.S. stocks and sectors, primarily in the mega-cap technology space, driven by the growing enthusiasm around artificial intelligence and generative AI broadly. However, this year we are seeing overall a broader group of sectors and asset classes that are outperforming. Let's take a look first at the S&P 500 sector returns.

Last year if you recall, U.S. sector returns were led by three sectors – technology, communication services, and consumer discretionary – all up by over 40% for the year. An important note is that while Canada also has the same sectors – the returns and make up of these sectors are not comparable. For example, the communications sector in the U.S. includes Meta and Alphabet, which are two of the Magnificent Seven, whereas the Communications sector in Canada consists of mainly Canadian telecom stocks, which are defensive and significantly lagged last year. The weights of sectors also contributed to the TSX underperformance. These top 3 U.S. sectors in 2023 made up almost 50% of the S&P 500, whereas they only accounted for roughly 15% in the TSX.

That doesn't mean that Canadians can't achieve gains based on U.S. sector performance because many Canadians hold US equities including those in the Magnificent 7. And this is why regional diversification is so important. What are we seeing this year? Indeed, we are seeing broader sector leadership. Areas like energy, and financials are up over 7% thus far in the U.S., and energy and industrials are up close to 10% in Canada.

And similarly, if we look at asset classes more broadly, as well as the Magnificent 7 cohort, we can see that while technology continues to lead in 2024, we are seeing some notable catch-up in the broader S&P Equal Weight index, the TSX in Canada, and the high-quality S&P dividend payers, as well as parts of international markets. And although bond markets remain slightly negative this year in both Canada and internationally, we could see this asset class perform better if interest rates move lower later this year.

What do we need to see for this to continue?

So, what conditions would we need to see for this broadening of market leadership to continue in the year ahead? I'll highlight three that we see as important precursors for this trend to continue.

First, we expect to see the central banks like the Bank of Canada and the Federal Reserve embark on a rate-cutting cycle this year. The inflation rates in Canada and the U.S. are nearing the target rate that the central banks need to see to begin to cut interest rates – albeit not in a straight line. We believe that 2-3 rate cuts in Canada and the U.S. are likely later in 2024, perhaps starting in the summer. Keep in mind that as interest rates move lower, the economy and consumption is supported, and stock market valuations have scope to expand, which we think is an important driver for better performance in cyclical and value parts of the market.

Next, we believe earnings growth should materialize this year across many sectors in 2024. Last year S&P 500 earnings growth was modest, up about 1%, and the biggest drivers of growth were in technology as well as communication services and consumer discretionary. This year, we see S&P 500 earnings growth higher, in the 10% range, driven by a broader group of sectors. Areas like health care, financials, industrials and even utilities are expected to contribute to growth, alongside technology and other growth sectors. So, we see a broadening in earnings growth also as a driver in the broadening of market leadership.

And finally, while the Canadian economy may continue to be soft in the first half of the year, we expect it to re-accelerate in the second half. The Canadian economy avoided a recession in 2023, in the face of rising interest rates with GDP growth of just over 1%. We would acknowledge that elevated household debt levels in Canada and higher interest rates have pressured household spending over the past year. However, lower inflation and potential interest rate cuts from the Bank of Canada could pave the way for a rebound in economic growth later in 2024. This is a backdrop which we believe favours a broadening of leadership, particularly in areas like cyclical and interest sensitive sectors, and small- and mid-cap stocks.

Market volatility and concentration of returns remind us of the importance of diversification.

Overall, equity market leaders are broadening. However, this year, like in any given year, we expect bouts of volatility to emerge. In fact, two to three pullbacks in the 5-10% range are the historical norm.

This makes the case for a well-diversified portfolio – that includes diversification across sectors, regions, and investment-types. As always, your portfolio should be positioned to reflect your risk tolerance and risk capacity and should be set up to help you meet your personal financial goals.

Speak with your advisor and let them know if anything in your life has changed. A life event like a new job, a move, a change in marital status, a new addition to the family or the loss of a loved one may impact your financial goals, including the timing of those goals, and the level of risk you're comfortable with to achieve them. Like a compass, your Edward Jones advisor will help you navigate life's journey and better position you to achieve all of your financial goals and priorities.

Thank you for joining us today and we look forward to seeing you for our next Market Compass in June.