In Q4 the expectation of pro-business policy changes from the incoming U.S. government, including potential tax cuts and deregulation, helped lift North American equity markets higher over the quarter. However, the looming threat of tariffs on imported goods and services casts a shadow over the economic outlook. Here's how our view of the economy and financial markets unfolded.
Several central banks took action to combat lower inflation rates and economic challenges by reducing interest rates. The U.S. Federal Reserve Board (Fed) lowered rates by 50 basis points in September and another 25 basis points in November, aiming to spur economic activity. Similarly, the European Central Bank cut rates by 25 basis points in both September and November. The Bank of England adjusted its key interest rate down to 4.75%, while the People's Bank of China also lowered its policy rates to support its troubled economy. In Canada, the Bank of Canada (BoC) reduced its policy interest rate from 4.25% to 3.25% in December, easing the pressure on Canadian households and boosting consumer spending and real estate market activity. Markets anticipate further rate reductions from the BoC.
Globally, economic performance was mixed. The U.S. economy grew at an annualized pace of 3.1% in the third quarter, as reported in the fourth quarter. China saw a year-over-year growth of 4.6%, Europe managed a modest increase of 0.4%, while the U.K. economy was flat at 0.0%. Japan's economy grew by 1.2% on an annualized basis. The Canadian economy grew in the fourth quarter (Q4) of 2024. According to data, real gross domestic product (GDP) increased at an annualized rate of 1.0% during this period.
Global inflation rates have generally eased, prompting many central banks to adjust their monetary policies. In November, inflation was at 1.9% in Canada, 2.7% in the U.S., 2.2% in Europe, 2.6% in the U.K., and just 0.2% in China. The chart below shows the world’s most important economy nearing pre-covid inflation based on their recent CPI figures:
Equity markets showed varied performance, with gains in Canada, the U.S., and Japan, while declines were observed in the U.K., Europe, China, EAFE, and emerging markets. This disparity underscores the value of a well-diversified portfolio in managing market volatility. Conversely, global bond prices fell as yields rose, driven by economic uncertainty which pushed investors to demand higher returns. In Canada, bond prices posted a small loss with yields increasing, influenced by potential tariffs and higher government spending.
Overall, as per the above illustration, the US continues to be the primary driver of market growth. The US equity market demonstrated resilience, securing a 2.63% return for the quarter. Large growth stocks were particularly strong, achieving a 7.07% gain, while large value stocks faced challenges, declining by -1.98%. Small caps, especially small value stocks, did not fare as well, with a -1.06% return, highlighting the disparity between growth and value investments within the domestic market.
Oil prices concluded the quarter higher, thanks to OPEC's decision to delay production increases until April 2025, although demand concerns, particularly from a weak Chinese economy, remain. Interestingly, the price of gold reached a new record high, indicating investor flight to safety amidst global economic uncertainties.
Turning to Canada's economy, high borrowing costs and a weakening labor market posed significant challenges in Q4. The economy grew at an annualized pace of 1.0% in the third quarter, with consumer spending driving growth but being offset by a drop in business investment. The unemployment rate rose to 6.8% by November, affecting consumer confidence and activity. The BoC's rate cuts are intended to stimulate consumer demand and encourage job creation. Despite these challenges, Canadian equities hit new record highs, with the Information Technology and Financials sectors leading the charge, while Communication Services and Real Estate lagged.
Looking ahead, investors should prepare for continued policy shifts, particularly around tariffs which could influence global trade dynamics and inflation. With the potential for further economic stimulus or policy adjustments, sectors likely to benefit from these changes, such as technology and finance, could remain attractive. However, in a diversified approach, stability in sectors like utilities or consumer staples might offer a buffer against volatility.
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