The Bank of Canada and the U.S. Federal Reserve rapidly increased interest rates over the past two and a half years, trying to walk the fine line between bringing inflation under control and not driving the North American economy into recession. These efforts have largely been successful, especially in the U.S.
The U.S. economy is continuing to grow at a good pace, having added a surprising number of new jobs in the past three months. It appears that this growth will likely be sustained into 2025. One troubling element that is propelling this growth, however, is the ongoing deficit spending by the U.S. Government. With an accumulated debt of $35 trillion and counting, there appears to be no current plan to bring it under control. At some point in the foreseeable future, this deteriorating financial situation will have to be addressed.
The continued strength in the U.S. economy and the taming of inflation has allowed the Federal Reserve to begin reducing overnight interest rates for the first time in almost four years. There is growing confidence that the tight money supply policy of recent years has achieved the desired effect of reducing inflation, which is now close to the targeted rate of 2.0%, after having been as high as 9% in 2022.
Over the past year, the divergence of economic performance between Canada and the United States has widened. In the second quarter of 2024, the U.S. economy grew at an annualized rate of 3.0% while Canada lagged at 2.1%. As a result, Canada’s relatively weak economy has allowed the Bank of Canada to be more aggressive on the interest rate front, having already cut interest rates three times this year. This has caused the value of the Canadian dollar to decline 4% compared to the U.S. dollar since the start of the year.
With the anticipation of lower rates, equities in sectors such as Materials, Industrials, Financials and Utilities have responded positively. This has broadened equity market performance beyond the Technology sector in the United States and helped Canada, whose market has strong exposure to public companies in these sectors. In addition, the energy sector has recently strengthened, due to the growing conflict in the Middle East. To this end, North American equity markets have performed very well during the first nine months of 2024. The S&P 500 Index delivered a total return of 24.5% in the United States (in Canadian dollars), while the S&P TSX Index in Canada returned an impressive 17.2%.
For many North American public companies, year over year earnings and cash flow comparisons have been difficult in recent quarters. However, as we head into the later stages of 2024 and into 2025, these comparisons are becoming more favourable and an acceleration in growth is expected. In the meantime, valuations across many of the companies in your portfolio remain in line with historical averages.
We will continue to monitor the economic situation with vigilance and will pursue our strategy to invest in corporate market leaders that we believe will perform well for the foreseeable future.
Third Quarter 2024
The Bank of Canada and the U.S. Federal Reserve rapidly increased interest rates over the past two and a half years, trying to walk the fine line between bringing inflation under control and not driving the North American economy into recession. These efforts have largely been successful, especially in the U.S.
The U.S. economy is continuing to grow at a good pace, having added a surprising number of new jobs in the past three months. It appears that this growth will likely be sustained into 2025. One troubling element that is propelling this growth, however, is the ongoing deficit spending by the U.S. Government. With an accumulated debt of $35 trillion and counting, there appears to be no current plan to bring it under control. At some point in the foreseeable future, this deteriorating financial situation will have to be addressed.
The continued strength in the U.S. economy and the taming of inflation has allowed the Federal Reserve to begin reducing overnight interest rates for the first time in almost four years. There is growing confidence that the tight money supply policy of recent years has achieved the desired effect of reducing inflation, which is now close to the targeted rate of 2.0%, after having been as high as 9% in 2022.
Over the past year, the divergence of economic performance between Canada and the United States has widened. In the second quarter of 2024, the U.S. economy grew at an annualized rate of 3.0% while Canada lagged at 2.1%. As a result, Canada’s relatively weak economy has allowed the Bank of Canada to be more aggressive on the interest rate front, having already cut interest rates three times this year. This has caused the value of the Canadian dollar to decline 4% compared to the U.S. dollar since the start of the year.
With the anticipation of lower rates, equities in sectors such as Materials, Industrials, Financials and Utilities have responded positively. This has broadened equity market performance beyond the Technology sector in the United States and helped Canada, whose market has strong exposure to public companies in these sectors. In addition, the energy sector has recently strengthened, due to the growing conflict in the Middle East. To this end, North American equity markets have performed very well during the first nine months of 2024. The S&P 500 Index delivered a total return of 24.5% in the United States (in Canadian dollars), while the S&P TSX Index in Canada returned an impressive 17.2%.
For many North American public companies, year over year earnings and cash flow comparisons have been difficult in recent quarters. However, as we head into the later stages of 2024 and into 2025, these comparisons are becoming more favourable and an acceleration in growth is expected. In the meantime, valuations across many of the companies in your portfolio remain in line with historical averages.
We will continue to monitor the economic situation with vigilance and will pursue our strategy to invest in corporate market leaders that we believe will perform well for the foreseeable future.