Market Compass video series

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.