In the face of a potentially bumpy year, Canadian stock and bond markets are set to conclude 2024 on a positive note, as outlined in a recent report from Edward Jones. The investment firm's optimistic forecast is grounded in three key factors that are expected to favor markets throughout the year: impending interest rate cuts from the Bank of Canada and the U.S. Federal Reserve, ongoing easing of inflation, and a projected resurgence of economic growth in the latter half of the year.
According to Angelo Kourkafas, senior investment strategist at Edward Jones, the recent strong rally in equities is primarily driven by the anticipation of rate cuts from the Fed and the Bank of Canada. In a recent interview, Kourkafas pointed out, "We've seen a moderation in inflation and some rebound in corporate earnings, which support the favorable outlook even though we're not yet out of the woods. Still, there are some downside pressures, especially for the Canadian economy."
While acknowledging potential challenges, Kourkafas stated that the Canadian economy has likely averted a worst-case scenario in terms of a downturn. This positive sentiment follows a surprising turn of events in 2023, which defied expectations of an economic recession and saw markets outperforming many predictions.
Investor attention is now concentrated on anticipated interest rate cuts, particularly after the Bank of Canada's aggressive rate hikes in 2023 aimed at combatting inflation. Statistics Canada reported a year-end inflation rate of 3.4% in December, showing improvement from the peak of 8.1% in June 2022. Bank of Canada Governor Tiff Macklem has emphasized that the path to achieving the central bank's two percent inflation target will not be linear.
Edward Jones identifies a "notable shift" in monetary policy as the core of its 2024 market outlook for stocks and bonds. Kourkafas predicts three to five rate cuts from the Bank of Canada this year, with a realistic estimate suggesting a potential one percent reduction in the policy rate.
Despite external geopolitical risks, the report anticipates that the failure of rate cuts to materialize represents one of the most significant risks to the market. Kourkafas, however, deems this scenario less likely while acknowledging the dependence on the path of inflation and economic conditions.
The report also projects that U.S. stocks will outperform Canadian equities. Kourkafas attributes this to expectations of better economic growth in the U.S., given the more favorable earnings outlook compared to Canada. The upcoming U.S. presidential election later in the year is expected to introduce some volatility, although it is anticipated to be short-lived.
Additionally, 2024 may witness a rotation back into defensive stocks and cyclical sectors, which lagged behind in 2023 as technology stocks dominated market gains. As interest rates decline in tandem with fixed-income yields, dividend stocks are expected to become more appealing.
Kourkafas concludes, "We believe this rotation is in its early stages, having observed it in November and December. Despite potential volatility along the way, we anticipate further developments in this trend throughout the year." In summary, the report suggests that Canadian markets are poised for a positive trajectory, buoyed by expected rate cuts, easing inflation, and a revival of economic growth in the latter part of 2024.
