MONTHLY MARKET MUSINGS

July 2024

A Lot Can Happen In A Year

On June 7th, 2023, the Bank of Canada (BoC) executed what would turn out to be its final rate hike during the most recent rising interest rate cycle leaving the overnight interest rate at 5.00%. One year later, on June 5th, 2024, the BoC kicked off the highly anticipated interest rate cutting cycle. With this monetary policy shift, inflation is officially no longer the concern it once was and has taken a backseat to the slowing Canadian economy. Expectations are now pointing towards several more rate cuts this year. CIBC Economics is forecasting another 25 basis point cut in September followed by a final 50 basis point cut to finish off the year at the December BoC meeting. A BoC cut in July remains a possibility but upcoming employment and inflation data will help to sway the central bank's decision. For 2025, it is expected to be more of the same with expectations that rates will be cut another 125 basis points ending 2025 at 2.75%.[1] Our U.S. counterparts have yet to start their cutting cycle as their economy has fared better than in Canada. The current belief is that the U.S. will start cutting rates in September and then continue more or less consistently through 2025 and beyond. Historically, in the 12 months following a first rate cut U.S. stocks have outperformed bonds and cash with an average real rate of return of about 11%.[2]

At the end of 2023, many wondered whether the strong rally would carry into the new year and if so how long would it continue? Our belief was that the strong rally would continue into mid-year and that view has panned out rather well. Thus far in 2024, the S&P 500 Composite Index (S&P) has put up a total return of about 15.8% while the S&P/TSX Composite Index (TSX) has returned approximately 6.2%. The Nasdaq Composite Index has outpaced both of those indices with a total return of approximately 19.4% due to its heavier-weighting in the technology sector, more specifically its exposure to the A.I. (Artificial Intelligence) revolution.

Below are the Global Industry Classification Standard (GICS)[3] sector total returns for the S&P and TSX year-to-date (YTD).

Source: Bloomberg; all return date is as of June 27, 2024

Most of the outperformance of U.S. equities can be attributed to the large weighting of Technology and Communication Services (which includes internet-based companies) stocks in the U.S. indices. Additionally, it can also be partially attributed to a better economic picture relative Canada. U.S. consumers have remained resilient and U.S. corporations have continued to put up relatively strong results. The second half of 2024 is likely to remain generally positive from an equity total return perspective. We noted a preference for U.S. equities over Canadian equities last year and we maintain that same sentiment going forward. Canadian stocks are expected to have a positive total return in the low-single-digits for the rest of 2024. Meanwhile we expect U.S. equities will deliver high-single-digit positive returns. As for the month of July, investors would be happy to learn that, historically, it is one of the better months of the year for U.S. equities.[4] According to Goldman Sachs, a possible catalyst for continued gains in the equity markets throughout July is the record US$7.3 trillion sitting in money market funds. The contention is that there could be a large influx of cash into the equity markets as the money market funds get reallocated.[5]

JAY SMITH, CIM®, FCSI

Senior Portfolio Manager & Senior Wealth Advisor    

jay.smith@cibc.ca

BRAD BROWN, MBA, CFA
Portfolio Manager & Associate Investment Advisor

brad.brown@cibc.com