Weekly Market Commentary January 16 2025

The Markets

Bond yields are rising—and they have investors’ attention.

Canada’s economic fundamentals remained strong in December, ahead of the New Year. That’s the sentiment echoed by a string of strong economic data that shows the economy continues to grow amid low interest rates and the backdrop of concerns about 25% tariffs from the U.S.

The first 2025 employment report came in better than expected. Approximately 91,000 jobs were added in December, which was significantly more than the 25,000 predicted, and the unemployment rate decreased from 6.8% to 6.7%. Better inflationary trends overall were supported by Canada's wage gains, which also decreased to 3.7% year over year, below estimates of 3.8%.

Overall, the employment data indicates two significant positive trends for economic growth. First, the unemployment rate is still low and benign, compared to historical long-term rates. This creates a favourable environment in which businesses and consumers can function. Second, employees take home favourable real wages because wage gains continue to outpace inflation. Additionally, this boosts consumer spending and confidence.

However, the likelihood of additional central bank rate cuts has decreased, as economic strength has improved. As a result, stock markets fell last week, and government bond yields increased. We think the bull market is still supported, even though higher rates might put pressure on valuations and cause some volatility, especially given that earnings growth is expected to continue to deliver in the upcoming year.

With just one week until the United States Inauguration Day, everyone is still waiting to see which policies, including tariffs, immigration reform, taxes, and deregulation, the new administration will prioritize and in what order. However, regardless of the initiatives that are prioritized, the markets may welcome the removal of policy uncertainty alone. Even though the political landscape is still uncertain, this serves as a helpful reminder that fundamentals, not politics or news, typically drive financial markets.

Meanwhile, the bond markets remain a buzz of activity, with yields rising to levels not seen in months, triggering a sell-off in the Canadian stock market. While the U.S. 10-year Treasury yield has been increased to 4.76%, the highest level since October 2023, the yield on Canadian 10-year government bonds has risen to 3.47%, the highest level since July 2024.

Amid the spike in bond yield, Canada’s main stock index, the Toronto Stock Exchange TSX, posted its most significant decline in over three weeks. It fell 1.2% to close at 24,767.73, its lowest closing level since the start of the year and the most significant decline since Dec. 18. The drop came as rising prospects that the Federal Reserve would pause its interest- rate cutting cycle encouraged investors to take some profits after substantial gains for the market in 2024.

Expectations of stickier inflation, a shallower central bank rate-cutting environment, higher deficits, and an economy that is still outperforming expectations have all contributed to the move higher in yields. Higher yields have caused stock markets to decline, but bear in mind that the Canadian TSX is down roughly 5.3%, and the S&P 500 is down only about 4% from its recent highs.

Last year, the United States Federal Reserve (Fed) lowered the federal funds rate by 1% (the federal funds rate is the interest rate the Fed charges banks. It influences other interest rates). This shift in Fed policy made a lot of people happy.

• Companies, business owners, and consumers cheered because Fed rate cuts typically lower borrowing costs. As a result, rates on business loans, home equity loans, auto loans and credit cards tend to move lower.
• Stock investors were enthusiastic because lower borrowing costs can reduce companies’ expenses and increase profits, and that can lift stock prices higher. Since the stock market moves in anticipation of future events, rate cut expectations are already reflected in many companies’ stock prices.
• Prospective homebuyers were optimistic. Fixed mortgage rates are linked to the yield of the 10-year U.S. Treasury note, and they hoped it might also move lower.

Bondholders were more skeptical. Even as the Fed was cutting the federal funds rate, yields on longer maturities of U.S. government bonds were moving higher—not lower. One reason is that economic data—including last week’s strong jobs report—continue to confirm that economic growth and inflation are exceeding expectations. As a result, the Fed may be inclined toward fewer rate cuts in 2025.

“For stocks, higher bond yields imply no increase in price/earnings ratios and possibly some contraction from current levels,” reported Randall W. Forsyth of Barron’s. Changing expectations for Fed actions and company performance is likely to shift analysts’ outlook for stock market performance.

There is a second reason for the divergence in Fed actions and government bond yields, according to economist Mohamed El-Erian, a columnist for Bloomberg. He explained that key government bond yields in advanced economies “are widely regarded as the most accurate gauge of the economic outlook, including growth, inflation and central bank policies.” In his opinion, “Yield increases show that investors are closely watching whether advanced economies have the ability to deal with high debt and rising borrowing costs.”

Last week, major U.S. stock indices moved lower, and yields on longer maturities of U.S. Treasuries continued to rise.

Source: FactSet

HOW MUCH DO YOU KNOW? Last year, Pew Research asked adults across the United States how much they knew about personal finance, a topic that includes “managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, and retirement, tax, and estate planning,” reported Will Kenton of Investopedia.

More than half (54%) of those who participated in the survey said they knew a great deal or a fair amount about personal finance. However, the results varied widely depending on the demographic attributes considered. For example, knowledge about money appears to increase with age, reported Khadijah Edwards of Pew Research Centre. For example:

Ages 18 to 29: 41% know at least a fair amount
Ages 30 to 49: 47% know at least a fair amount
Ages 50 to 64: 60% know at least a fair amount
Ages 65 and older: 67% know at least a fair amount

Extrapolating that result suggests that about two-thirds of Americans may know a fair amount about personal finance as they approach retirement. Many survey participants learned what they knew about money from family and friends. Others said they relied on:

• The internet,
• A college or university course,
• Media (news, documentaries, and books), and
• Elementary or high school classes.

When asked about various issues related to finances, respondents were more confident in their ability to accomplish some tasks than others. For example, participants were confident they could:

• Find their credit report 75%
• Make a monthly budget 59%
• Develop a plan to pay off debt 57%
• Create a plan to save money 56%
• Build an investment plan to grow wealth 27%

If you have friends or family members who would benefit from knowing more about how to manage, save, and invest money, gifting a subscription to a personal finance publication could make a difference. You’re also welcome to share our contact information. We help people pursue their financial goals.

Weekly Focus – Think About It

“Real knowledge is to know the extent of one’s ignorance.”

—Confucius, philosopher

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.