weekly market commentary january 2 2024

Canadians Less Optimistic

Canadians are less optimistic about the economy, more than ever. That’s the sentiment echoed by the Bloomberg Nanos Canadian Confidence Index, which has plunged to its lowest level in a year. The pessimism has been fueled by the incoming U.S. president, Donald Trump, who threatened to hit the country with tariffs of up to 25%.

The U.S. is Canada’s biggest trading partner. Canadian consumers and businesses heavily rely on American-made goods, as exporters rely on the ability to ship minerals, cars, energy, and other goods. Some economists estimate that tariffs would reduce the Canadian gross domestic product by 2% to 4%, depending on how they are implemented and how Canada reacts.

According to the Bloomberg Nanos survey, roughly 60% of participants believe the Canadian economy will deteriorate over the next six months. That represents a sharp increase from 34% eight weeks ago and the most significant percentage of negative sentiment on that question in over two years.

Additionally, the Canadian outlook for the bond market is deteriorating. The difference between the 10-year benchmark yields in the U.S. and Canada has exploded to almost its most significant level since the global financial crisis, at the very least. Investor perceptions of the two economies' relative long-term growth potential and inflation pressures are reflected in that spread.
Nevertheless, it is not the first time that Canadians have been pessimistic about the economy. Heading into 2024, Canadians and economists were worried whether the economy would avoid a recession, as interest rates remained at record highs. The uncertainty forced banks to tuck billions of dollars aside if the economic situation worsened. As the year progressed, the economy fared better. The real gross domestic product growth has averaged nearly 2%. The Bank of Canada led all G7 central banks in lowering their policy rate, which was cut five times in a row from 5% to 3.25%, with inflation anchored at 2%. Private-sector economists anticipate further reductions to 2.75% by mid-2025, the midpoint of the nominal neutral interest rate range that the Bank of Canada estimates.

In the future, a non-inflationary acceleration of economic activity will be supported by robust supply-side drivers, such as improving business investment and the increased labour force participation of working-age women. Canada is predicted by the International Monetary Fund (IMF) to lead the G7 in GDP growth in 2025, with private-sector economists predicting growth of 1.7%.

Meanwhile, 2024 has been an exceptional year for investors. The Canadian equity market has been on a roll, backed by gains in the commodity and technology sectors. S&P/TSX Composite index has increased by more than 18% in 2024, in what is turning out to be one of the longest bull runs. Nevertheless, the gains could have been more, had Trump not threatened a 25% tariff on the country’s imports. The threat triggered a massive pullback in the equity market, mostly affecting the energy sector, given that crude oil is Canada’s biggest export.

The Markets

Consumers were more optimistic. Investors were less so.

As we neared the end of 2024, U.S. consumers were feeling optimistic. Every month, the University of Michigan Survey of Consumers conducts about 600 interviews with American households, asking interviewees about their personal finances, business conditions, and buying conditions.

In December 2024, the Index of Consumer Sentiment was up 3.1% month to month, and 6.2% year to year. Consumer sentiment rose “for the fifth consecutive month…reaching its highest value since April 2024. Buying conditions exhibited a particularly strong 32 [%] improvement, primarily due to a surge in consumers expecting future price increases for large purchases…Broadly speaking, consumers believe that the economy has improved considerably as inflation has slowed, but they do not feel that they are thriving; sentiment is currently about midway between the all-time low reached in June 2022 and pre-pandemic readings,” reported survey Director Joanne Hsu.

Individual investors, on the other hand, were feeling less bullish than they did earlier in the month. The AAII Investor Sentiment Survey found that investors’ outlook shifted in December. Investors became more uncertain, and a higher percentage reported feeling bearish.

Investor sentiment is often considered to be a contrarian indicator. The AAII website explained, “Although investors would like to imagine that their decisions are rational, most have bought at near-highs due to fear of losing out on gains and sold at near-lows due to fear of further losses. This herd behaviour is called market sentiment; when market sentiment is low, the majority believes the market will fall, while high market sentiment means that the majority feels the market will rise in value. However, more often than not, the market will move against the sentiment of the majority. Therefore, many professional money managers use market sentiment as a contrarian indicator, buying when sentiment is pessimistic and selling when sentiment is optimistic.”

Last week, major U.S. stock indices finished higher, and yields on longer maturities of U.S. Treasuries rose. The benchmark 10-year U.S. Treasury yielded 4.62% at the end of the day on Friday.

Source: FactSet

IDIOMS DON’T SAY WHAT THEY MEAN…If you’ve ever “cried wolf,” “gone the extra mile,” or “had butterflies in your stomach,” then you’re familiar with idioms—phrases that don’t mean what they say. They’re used to “add colour” to communications, making what’s said or written more memorable. The English language has a lot of idioms about money. Test your knowledge of money idioms by taking this quiz.

1. Someone says, “You can take it to the ” What they mean is you should:
   a. Make a
   b. Proceed with caution, it may be a scam
   c. Believe a statement is true and accurate
   d. Understand that a venture will generate a lot of money
2. If someone is “living on a shoestring,” they have a very limited Which of the following may explain how the saying originated?
   a. Shoestrings are thin and break easily
   b. Peddlers once made a living by traveling town to town selling shoelaces
   c. British prisoners would lower a shoe by its laces through cell windows hoping someone would give them money
   d. All of the above
3. If you believe that a new product or service will do well you might say it will:
   a. Break the bank
   b. Put cash on the barrelhead
   c. Sell like hotcakes
   d. Hop on the gravy train
4. When people offer aid to a person or group in need, they are:
   a. Striking while the iron is hot
   b. Following the herd
   c. Playing the long game
   d. Offering a helping hand

Weekly Focus – Think About It

“When we love, we always strive to become better than we are. When we strive to become better than we are, everything around us becomes better too.”

—Paulo Coelho, author

Best regards,

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Disclaimer:

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Eric Muir and Derek Lacroix and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member Canadian Investor Protection Fund.