Weekly market wrap

Heading into year-end: On track for a soft-landing in the economy

Key Takeaways:

• As we head into year-end and the holiday season, investors have many reasons to cheer. The stock markets in the U.S. and Canada have been making record highs, and bond markets still offer favourable yields. Perhaps most importantly - and underpinning the solid financial markets - is that the U.S. and Canadian economies continue to grow at or above trend, with no signs of recession on the horizon.
• This past week, data continued to point to resilient labour markets as well. In both the U.S. and Canada, new jobs added in November were above expectations after a softer October. The unemployment rates ticked higher in both economies but remain well below long term averages.
• Overall, the fundamental backdrop for financial markets remains intact, and the U.S. and Canadian economies appear poised to achieve the elusive "soft landing" (modest slowdown but still growing at or above trend). As we look toward 2025, we would expect consumers to be supported further by lower interest rates and wage growth that exceeds inflation rates.
• Despite potential policy uncertainty and market volatility ahead, we continue to believe that pullbacks can offer opportunities for investors, especially because we don't see an economic downturn for now.

A resilient economy continues to be a theme for 2024

Since 2020, U.S. and Canadian economic growth have been impressive, with GDP growth rates well above long-term trends. 2024 has been no exception. The quarterly annualized growth rates this year in the U.S., for example, have averaged 2.5%, and the fourth quarter appears on pace to exceed this. According to the Fed GDP-Now forecast, the fourth-quarter economic growth forecast is near its highest since the quarter began, at around 3.3%.

What's behind the ongoing strength in the U.S. and Canadian economic data? We point to two key factors:

1) The consumer remains in good shape overall:

We know the backbone of the economy is the consumer, which drives about 70% of U.S. GDP and about 55% of Canadian GDP. Of course, consumers have faced challenges over the past year in elevated inflation readings and higher interest rates, which have pressured both spending and borrowing. Nonetheless, data continues to point to healthy rates of consumption, particularly for services, including leisure, hospitality, travel and dining.

Perhaps one component of this is the dichotomy between lower-income and middle/upper-income consumers. The latter have benefited from increased wealth effects from areas like higher stock markets and stable and higher home prices. This in turn has supported better spending from this cohort, which generally makes up over 50% of overall consumer spending.

More broadly, we have also seen positive trends in real wage gains across households. Since 2023, wage growth has outpaced the rate of inflation, which has been supportive of consumer confidence and consumption. We would expect this trend to continue as we head into 2025 and as inflation, in our view, moderates further and remains contained in the 2% - 3% range.

2) The labour market has been resilient

The labour market has also been a source of strength for the U.S. and Canadian consumer. As we know, when consumers feel confident in their jobs, they tend to be more willing to spend.

Last week, labour data in both the U.S. and Canada confirmed that the labour market is healthy. In the U.S., Friday's nonfarm-jobs report showed total jobs added came in at 227,000, above forecasts of 220,000, and rebounded nicely from last month's revised figure of 36,000, which had been weighed down by natural disasters and a strike at Boeing. The average monthly jobs-added figure this year is 180,000, which, while below last year's 242,000 average, is still above longer-term averages of about 150,000.

The U.S. unemployment rate ticked higher last month, from 4.1% to 4.2%, but remains comfortably below long-term average unemployment rates of around 5.7%.

Similarly, in Canada the labour report for the month of November was overall quite healthy. The total jobs added were about 51,000, above forecasts of 25,000. And the unemployment rate, while it did tick higher to 6.8% remains below the long-term average of around 8.0%. In our view, the labour market in both economies continue to normalize after a period of outsized strength after the pandemic in 2020.

While we could see some further moderation ahead, we anticipate that the unemployment rates remain contained, and we may see a reacceleration in the labour market in the back half of next year. This could be driven by lower rates, better economic and corporate-earnings growth, and potential pro-growth policies that may spur additional hiring needs.

New "walls of worry" to climb

As we head into 2025, the U.S. and Canadian economies will undoubtedly face challenges, and markets will have new "walls of worry" to climb. These could include uncertainty around policy coming out of the new White House. Policy changes to areas like tariffs and immigration could weigh on consumer confidence, inflation, and overall economic growth. Any escalation in trade conflicts could also spark volatility and uncertainty. However, in our view, the most extreme versions of these policy proposals are unlikely to be adopted, and the overall impact to the economies will likely be contained.

In addition to government policy uncertainty, markets may also face some uncertainty around central bank rate-cutting policy. If growth remains robust and any risk of inflation re-emerges, the rate-cutting cycle may be shallower than already expected. Nonetheless, we believe that policy rates in the U.S. and Canada are heading lower over the next 12 months, even if just incrementally so, which should be supportive to the consumer and corporations.

Use pullbacks as opportunities

After another solid year in financial markets and the economy, investors should be prepared for increased uncertainty ahead. Whether driven by government policy or concerns over central bank policy, markets will likely face some headwinds in the coming year.

However, given the fundamental backdrop of an economy that continues to grow at healthy rates, investors can use market volatility as an opportunity to ensure that their investments are well positioned for this environment of solid growth amid heightened uncertainty.

We recommend remaining overweight in U.S. stocks, particularly large-cap and mid-cap stocks, with a mix of growth and value sectors. While mega-cap technology led the way higher for much of the last couple years, we believe sector diversification will be a key theme and driver of returns.

Within the bond market, we recommend reviewing short-duration bonds and cash-like instruments to ensure that portfolios are not too overweight cash. With yields likely headed lower in the next year, we believe excess cash can be gradually deployed into strategic allocations in stocks and bonds.

In the investment-grade bond market, we favour intermediate maturity bonds that can lock in higher yields for longer and can do well if interest rates move lower. Overall, with the U.S. and Canadian economies on track for a soft landing and no downturn in sight, we continue to see opportunities for investors emerging in the year ahead in both stocks and bonds.

Mona Mahajan
Investment Strategy

Weekly market stats

Source: FactSet, 12/6/2024. Bonds represented by the Bloomberg Canada Aggregate Bond Index. Past performance does not guarantee future results. *Source: Morningstar Direct, 12/8/2024.

The Week Ahead

Important economic releases this week include the BoC interest rate decision and U.S. CPI inflation.