October 9, 2024

Markets rallied with expanding breadth

Investor sentiment shifted to a “risk-on” attitude in the third quarter, in response to changes in central bank monetary policy across key economies. It began with the Bank of Canada (BoC) and the European Central Bank (ECB) in the second quarter. The BoC was particularly active, making two additional cuts of 25 basis points (0.25 percentage points) to its overnight rate this quarter. The U.S. Federal Reserve (the Fed) started its own policy easing with a surprise 50 basis-point (0.5-percentage-point) cut in mid-September, launching rallies in both bond and equity markets. 

  

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While the Fed may have surprised investors with a larger-than-expected cut, a closer look at the U.S. economy suggests that the need for interest rate cuts, at that point in time, was justified. The Fed noted an increase in the unemployment rate that is becoming a concern, while the battle against inflation is no longer a primary reason to maintain a restrictive monetary policy. Fed chair Jerome Powell stated, “If the labour market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond.”

Canadian equities, as measured by the S&P/TSX Composite Index, were the best-performing among the major indices this quarter, rising 9.7% with support from the real estate and financial sectors. In Canadian dollar terms, the U.S.-based S&P 500 Index gained 4.2% for the quarter and 23.6% for the year-to-date.

Toward the end of the quarter, the Chinese government's stimulus package (which was larger than anticipated) aimed to renew growth in China while supporting its equity markets. The measures are intended to counteract deflationary pressures, increase consumer demand and reverse a significant downturn in the property market. While the short-term outlook appears promising, the long-term impact remains to be seen.

When we reflected on the drivers of performance in the third quarter, we isolated the Chinese stimulus package and the Fed’s larger-than-expected rate cut as the two key macro events.

Looking ahead through the remainder of 2024 and into 2025, we can confidently say the inflation battle has been won. The focus has now shifted to supporting a weakening labour market in Canada and the United States. Despite some of the geopolitical risk emanating from the ongoing conflict in the Middle East and the upcoming U.S. election, we see the market environment as generally improving, with neither event likely to have a meaningful impact on investment portfolios over the long term. We see a soft-landing scenario emerging in the U.S. and other areas around the world. This should support equity markets and help bond returns, as interest rates continue to fall from where they are today.

We suggest investors focus on maintaining a diversified portfolio geared to their financial goals and ignore the noise.

Find out more in our 2024 Third Quarter Market Review.

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