North American equity markets have delivered strong returns over the past two years, particularly in the United States. In each year, the S&P 500 Index returns have exceeded 25%. While the performance of 2023 was concentrated in a few technology or technology-oriented stocks, the experience in 2024 was one of improved breadth but still relatively concentrated. This level of performance is quite extraordinary but unlikely to be sustained.
Looking into the new year, we expect increased market volatility. The political environment will be one of upheaval with the return of Donald Trump to the White House and the Republican Party controlling all three branches of government. Meanwhile in Canada, the long serving Prime Minister has resigned and an election could be called by spring. The ill-timed resignation and prorogation of Parliament comes at a critical time of tariff negotiations as a more emboldened U.S. administration moves in.
In the United States, the Republican Party has a clear two-year window to implement its “America First” agenda. As it stands, many of the plans espoused by the incoming administration will be easier said than done. Lowering taxes and de-regulating various industries will excite the private sector but may also cause longer-term harm. One needs only to recall the financial crisis of 2008-2009 to witness the havoc created by relaxed bank regulations. Reducing government overhead by massive amounts sounds attractive but will be difficult to implement as many expensive elements of the U.S. budget, such as the military, Medicare or Social Security, are untouchable. In the corporate world, past tax cuts have often led companies to use surplus free cash flow to buy back shares or pay down debt, rather than investing for growth. It is not clear that tax cuts lead to enhanced corporate value or sustained economic growth. Finally, the implementation of tariffs by the U.S., and the retaliatory tariffs or export restrictions by its trading partners, will likely be inflationary and could potentially hamper economic growth.
In both Canada and the U.S., federal government debt levels are growing rapidly. The short-term benefits of these stimulative policies, which should continue through 2025, will eventually lead to longer term pain. At some point, the bond market will impose discipline on otherwise irresponsible political leaders in the form of higher interest rates.
Politics aside, economic growth is expected to continue on both sides of the border. In the shorter run, most of the new policies will not restrict this growth. The threat of tariffs is the one element that would cause damage to both the North American and global economies.
With all of this in mind, we are heading into 2025 with a cautious mindset that we feel is warranted in light of current market valuations. Our strategic priority is to protect the value of your portfolio, leaving us in the position to capitalize on opportunities as they arise.
Fourth Quarter 2024
North American equity markets have delivered strong returns over the past two years, particularly in the United States. In each year, the S&P 500 Index returns have exceeded 25%. While the performance of 2023 was concentrated in a few technology or technology-oriented stocks, the experience in 2024 was one of improved breadth but still relatively concentrated. This level of performance is quite extraordinary but unlikely to be sustained.
Looking into the new year, we expect increased market volatility. The political environment will be one of upheaval with the return of Donald Trump to the White House and the Republican Party controlling all three branches of government. Meanwhile in Canada, the long serving Prime Minister has resigned and an election could be called by spring. The ill-timed resignation and prorogation of Parliament comes at a critical time of tariff negotiations as a more emboldened U.S. administration moves in.
In the United States, the Republican Party has a clear two-year window to implement its “America First” agenda. As it stands, many of the plans espoused by the incoming administration will be easier said than done. Lowering taxes and de-regulating various industries will excite the private sector but may also cause longer-term harm. One needs only to recall the financial crisis of 2008-2009 to witness the havoc created by relaxed bank regulations. Reducing government overhead by massive amounts sounds attractive but will be difficult to implement as many expensive elements of the U.S. budget, such as the military, Medicare or Social Security, are untouchable. In the corporate world, past tax cuts have often led companies to use surplus free cash flow to buy back shares or pay down debt, rather than investing for growth. It is not clear that tax cuts lead to enhanced corporate value or sustained economic growth. Finally, the implementation of tariffs by the U.S., and the retaliatory tariffs or export restrictions by its trading partners, will likely be inflationary and could potentially hamper economic growth.
In both Canada and the U.S., federal government debt levels are growing rapidly. The short-term benefits of these stimulative policies, which should continue through 2025, will eventually lead to longer term pain. At some point, the bond market will impose discipline on otherwise irresponsible political leaders in the form of higher interest rates.
Politics aside, economic growth is expected to continue on both sides of the border. In the shorter run, most of the new policies will not restrict this growth. The threat of tariffs is the one element that would cause damage to both the North American and global economies.
With all of this in mind, we are heading into 2025 with a cautious mindset that we feel is warranted in light of current market valuations. Our strategic priority is to protect the value of your portfolio, leaving us in the position to capitalize on opportunities as they arise.