Stock-market investors have enjoyed a banner 2024 despite the decline in the markets today.
The age-old question is where the markets go from here.
Markets in the U.S. fell today after U.S. Federal Reserve chair Jerome Powell said the Fed intends to slow the pace of interest-rate cuts. Most Fed officials' projections newly project two rate reductions next year, down from four in their last meeting.
The S&P500 fell 2.95 per cent to 5,872, while the Nasdaq Composite Index was down 3.56 per cent, to 19,392. The Nasdaq had traded above 20,000 for the first time Dec. 11.
Canada's benchmark Toronto Stock Exchange (TSX) Composite Index fell 2.24 per cent to 24,557, making its return 17.65 per cent so far this year.
If the TSX regains ground lost since early December, when it was up more than 23 per cent year-to-date, it would be on track for its best year since 2009, when it returned 30.69 per cent.
Investor confidence in 2024 was likely fuelled by the prospect, and then the reality, of Bank of Canada interest-rate cuts at a time when the country’s inflation rate steadily declined to 1.9 per cent in November from a 39-year high of 8.1 per cent in June 2022. Five Bank of Canada interest-rate cuts lowered the central bank’s key interest rate to 3.25 per cent, down from five per cent in May. Economists, such as Central 1 chief economist Bryan Yu, told BIV that they expect the central bank to lower that interest rate further.
The U.S. Federal Reserve today reduced that country's key interest-rate by 25 basis points, to a range between 4.25 per cent and 4.5 per cent, a two-year low. It lowered rates by 50 basis points in September and then by 25 basis points last month.
Those moves helped U.S. markets surge even more than Canadian ones despite the rate cuts in total adding up to be cumulatively less.
Various professional money managers in Vancouver told BIV that they have disproportionately weighted client funds in U.S. stocks in part because American equities have tended to outperform Canadian counterparts.
Even after today's carnage, the S&P 500 index is up 23.81 per cent so far this year. This follows a 24-per-cent gain last year and if this year's gains hold, 2024 would be the first time since 1998 that the index has risen by more than 20 per cent in two consecutive years.
Real estate investing lagged in 2024
For much of the past couple decades, a preferred investment for many in Greater Vancouver was to buy residential real estate, though that asset class has recently struggled when compared with stocks.
The Real Estate Board of Greater Vancouver pinned the benchmark price for all residential properties in the region at $1.17 million at the end of November, up a mere 1.45 per cent compared with the end of September 2022.
During that same period, the TSX Composite Index returned more than 39.5 per cent while the S&P 500 generated a return greater than 68.2 per cent.
Those exposed to the Nasdaq 100 index, which is heavily weighted with technology stocks, saw a nearly 90.8-per-cent gain in the 26-month period between the end of September 2022 and the end of November.
“You can't forecast this stuff,” Murray Leith, Odlum Brown’s executive vice-president and director of investment research, told BIV.
“The returns surpassed even the most optimistic prognosticators by quite a long shot.”
Unpredictability in markets has fuelled the trend of investors buying exchange-traded funds (ETFs) that simply track an index of stocks.
The shift toward index funds—passive investments with low management fees—is also because actively managed funds for many years have consistently underperformed, in part due to fees.
In 2024, total assets in U.S.-based passive mutual funds and ETFs surpassed those in active ones for the first time, according to Morningstar research.
This came thanks to passive funds attracting higher capital inflows than active funds in each of the past nine years, it said.
Leith said he believes part of the value provided by active money managers, such as himself, is that he ensures clients are diversified.
“The problem with human beings is that they're emotional, and they tend to want more when something is going up and less when it's going down,” he said. “They zig when they should zag, and vice-versa.”
He added that U.S.-index ETFs have outperformed largely because of banner runs by mega-cap technology stocks such as Apple Inc. (Nasdaq:AAPL), Nvidia Corp. (Nasdaq:NVDA) and Amazon.com Inc. (Nasdaq:AMZN).
“People's enthusiasm for the U.S. stock market and U.S. stocks is perhaps a little too enthusiastic,” he said.
“People should be diversified into other areas and not just be overweight in the big tech stocks that have been driving the U.S. market.”
Despite that sentiment, he told BIV that he was not predicting that the TSX would outperform American stock markets next year.
Trump tariffs, deregulation and 2025
Leith said the darkest cloud hovering above Canadian stock markets in 2025 is the potential that President-Elect Donald Trump will levy tariffs on imports from Canada.
Trump recently threatened a blanket 25-per-cent tariff on Canadian goods unless the country stopped drugs and migrants from entering the U.S. illegally.
Canadian stocks immediately declined but soon recovered.
“The market is discounting the potential of tariffs and not saying that it is a real potential challenge,” said Leith Wheeler Investment Council CEO and managing partner Jim Gilliland.
There are other ways a Trump presidency could impact stock markets.
Gilliland said Trump has promised to chop regulations in sectors such as banking, which would help the U.S. financial sector, including Canadian banks that do business in the U.S.
Whether calls for Ottawa to deregulate the Canadian banking sector will materialize in 2025 is unknown, he said.
Gilliland said he thinks investors in the TSX, which is heavily weighted with financial stocks, are not yet pricing in a potential benefit from Canadian banking deregulation.
“Regulatory compliance has ballooned over the last 15 years and these things kind of work like pendulums. The last 15 years has been an increased regulatory environment, and we might start seeing a reduced one,” he said.
Another stimulus for the TSX could come, ironically, if Trump levies tariffs on Canada.
Leith, Gilliland and others, such as Thane Stenner, a senior portfolio manager at CG Wealth Management’s Stenner Wealth Partners, all agreed that a consequence of U.S. tariffs on Canada would likely be a weaker Canadian dollar.
Thane Stenner, a senior portfolio manager at CG Wealth Management’s Stenner Wealth Partners, believes mining companies are in the early innings of a bull run | Rob Kruyt
Companies’ assets would hold their values, but it would take more Canadian dollars to reach those values. Inflated corporate-asset valuations would then find its way into the companies’ stock prices, they said.
“This would be especially true for companies that export, but there would be an initial hit [to stock prices] first” Stenner said, adding that the increase in corporate valuations may take a year or two.
“The other thing that would really be a strong trend is that there would be a lot of American companies buying and taking over Canadian ones with mergers and acquisitions,” he said.
Stenner said that when the Canadian dollar was worth less than US$0.70 in the 1990s and aught years, there was a “tremendous amount of takeover activity.”
He, like Leith and Gilliland and Yu, said the Canadian dollar could easily trade in the US$0.65-to-US$0.70 range in the next year.
Stenner, who told BIV that his company manages more than $1 billion in client assets, and who specializes in managing portfolios for ultra-high-net-worth individuals, said he has been increasing his exposure to mining companies and to those ventures that produce various commodities.
“We think we're in early innings of a bull market in commodities,” he said.
Copper, lithium, cobalt, uranium, precious metals and rare-earth metals are some of the metals and commodities he is tracking.
He has been bullish on stocks exposed to artificial intelligence for years but has become “very cautious" on that niche sector because share prices have rapidly appreciated.
“I do not know how to assess Bitcoin,” he said of the cryptocurrency that earlier this month surpassed US$100,000 per unit for the first time.
“I don't know how to objectively, truly understand its use over time.”
He said that he has held a “decent” amount of Bitcoin exposure for clients and that he favours selling between 50 per cent and 70 per cent of those positions now given the cryptocurrency’s recent spike in valuation.
His experience in 2024 has been at times to hold as much as 60 per cent of his clients’ capital in cash.
“We’ve been very active,” he said. “We’ve been moving things around quite a bit.”
The S&P 500’s holdings are weighted by market capitalization so larger companies comprise larger slices of the index.
Stenner said that his performance in recent years has beaten a formulation of the S&P 500 index that weighs all 500 stocks equally and is hedged to the Canadian dollar.
The ticker symbol for one ETF that tracks that benchmark is TSX:EQL-F. It was up a little more than 13 per cent so far this year until yesterday.
