Fall 2024 Market Update
The summer months continued the trend we have seen thus far in 2024 – with quality, consistent returns interrupted by short bouts of market volatility. While investors continue to remain optimistic that the world’s largest economy in the United States trends for a soft landing, any economic data to the contrary has resulted in market volatility. For investors who embraced the European philosophy of taking a full summer holiday, you will be pleased to see meaningful gains for the summer months and the year as a whole. Those who keep a more watchful eye on their investment statements may have noticed these bumps in the road, but sticking to the plan has been well rewarded.
Inflation and interest rates continue to remain in focus, in North America. The Bank of Canada has led the way on interest rate cuts, with 3 cuts for a total of 0.75%, as of September 4th. The U.S. Federal Reserve also began its easing cycle – with a larger-than-expected 0.50% cut at their September 18th meeting. Both Canadian and U.S. central banks currently walk a tightrope of easing monetary conditions to ensure that their respective economies can continue to grow. At the same time, they have acknowledged that reducing rates too much too soon, could result in an inflationary resurgence, like what was seen in the late 1970s/early 1980s.
The expectation of interest rate cuts resulted in improved returns in the fixed income markets, as had been anticipated over the past year. Aggregate bond indices in the U.S. and Canada gained as much as 8.50% between May and September. The optimism around the potential of a “soft landing” (no recession or hyperinflation) in the U.S. resulted in gains through the summer months, with the S&P 500 and the S&P TSX Composite up 12.89% and 10.38%, respectively in that time.
Looking Ahead to the U.S. Election
Moving to politics, once again an election looms large over the world’s largest economy, with a late withdrawal by President Biden resulting in a showdown between former-President Trump and Vice President Harris. While we may have our individual beliefs about how an election will impact the financial markets, history shows us that the only thing that matters to markets is moving from a period of uncertainty, created by a pending election, to a period of certainty, once the election has passed. It’s important to note that, historically, markets tend to finish an election year higher 83.3% of the time, with full-years returns being modest, at 7.3% on average.
Sources:
*https://www.carsongroup.com/insights/blog/16-charts-and-tables-to-know-this-election-year/
For this reason, we believe it most important to focus on ensuring our portfolios are well diversified, meet client risk tolerances and ignore the noise that predictably comes with the U.S. election cycle every four years.
We’ve been very happy with the performance experienced by investors in our model portfolios so far in 2024, and we continue to remain cautiously optimistic about the months ahead. Key changes to the models during the summer months resulted in profit taking from our holdings in major U.S. stock market indices, and moving those proceeds into low volatility investments designed to protect client capital, in the case of market instability. Thus far, this adjustment has yielded great results for clients.
Looking ahead, the primary concerns for investors are inflationary pressures, central bank policy, and the potential for economic slowdowns in key regions like the U.S., Europe, and China. In Canada, continued moderation in inflation will be key to assessing future interest rate decisions. For investors, diversification across all asset classes (fixed income, equities and alternative investments) and regions, remains essential to navigating market uncertainty.
The Japanese Carry Trade
You may have heard this phrase before, and it hit the front pages of many business news websites in early August when volatility really spiked across the markets. It may also leave you wondering – what exactly is the Japanese carry trade?
In short, since Japan has had interest rates at or near zero for many years (since approximately 1996), investors began to see an opportunity with interest rate differentials. Investors would borrow large quantities of Japanese yen, paying very little interest, and exchange the Japanese yen for another currency, such as U.S. dollars, and invest the proceeds in higher interest rate investments, such as U.S. bonds or even stocks. Due to the very low borrowing cost, investors were able to profit from the higher returns they made, with a low cost to carry the debt they were using to invest.
The two main risks to this type of investment strategy are large, unexpected changes to exchange rates or interest rates. In the case of August 2024, a surprise rate increase from 0% to 0.50%, coupled with economic surprises in the U.S., caused investors to begin unwinding their “carry” trades. This resulted in sharp, short-term losses for stock markets in Japan and globally as investors were forced to sell their investments to pay back the loans.
The Green Sleeve Initiative
What is the Green Sleeve? The Green Sleeve is a ‘green’ designated folder where you can keep a copy of your personal directive, a list of your current medications, emergency contacts, and any other special instructions or wishes that you may want health care professionals to know in the event of an emergency. You then keep this folder on top of your fridge where every first responder in Alberta is trained to look for such documents!