January 2025 - Monthly Update
Kaitlyn Richardson - Jan 01, 2025
Hope this note finds you and your family well as we launch into 2025 and the second half of this decade.
Your portfolio declined in December. It remains with positive performance over the last twelve months.
As we look out over the next few weeks, we should not be surprised to see tariffs put in place by the United States (U.S.) and reciprocated by Canada and Mexico.
On tariffs, the relevant medium-term trend for North American investment markets and the economy is how high and for how long. We expect the duration and level to be lower than consensus expectations/fears.
For Canada, there are two mitigating factors to offset some of the impact of tariffs:
- Foreign Exchange Rates
- Differences in Overnight Interest Rates
A seventy cent U.S. dollar (USD) to Canadian dollar (CAD) represents a relatively weak level of foreign exchange for the CAD. All things equal, it costs less USD to buy and import Canadian exports (meaning exports remain attractive and continue to flow from north to south).
What’s more, overnight interest rates are over one percent lower in Canada compared to the U.S.. This range continues to widen as the Bank of Canada cuts interest rates faster and further than the U.S. Federal Reserve. The cost of funding and financing business in Canada is lower than the U.S. This does not make our exports more expensive.
We do expect a recalibration of some aspect of the trade relationships in North America. With hundreds of years of doing business together, if anything there are opportunities for this mutually beneficial and enduring relationship of commerce to expand in the years and decades ahead. It is very likely North America will be an even bigger and more integrated economic ecosystem over the second half of this decade and beyond.
For the U.S. economy, the path of least resistance remains one of expansion. Current data points continue to reflect an economic trajectory that is more resilient than consensus expectations. Look no further than the over 400,000 net new jobs that were created in December alone. Businesses do not hire a new full-time employee with a six-to-twelve-month horizon. New jobs are budgeted for years, not months. These realities also imply a slower cycle of interest rate cuts from the U.S. Federal Reserve. A more gradual and extended timeline of easing of financial conditions in the U.S. serves as a tailwind to prolong the cycle of U.S. economic growth at a more normal pace.
Our investment strategy remains unchanged: Own a diversified set of high-quality U.S. stocks aligned with the growth trajectory of the U.S. domestic economy and complimented with a selection of Canadian bonds and bond like stocks aligned with Canada’s cycle of further interest rate cuts.
You and your wealth remain in a strong position.
The view from Brian Belski, BMO's Chief Investment Strategist:
“US stocks were unable to sustain momentum in December with the S&P 500 [declining] on the heels of the best of the year’s… gain in November. Nonetheless, the index still managed to deliver an impressive annual gain... And while most investors that we speak with remain bullish longer term, there remains a vocal minority that is questioning the sustainability of market gains given this strength over the past two years. Obviously, the small sample size of back-to-back [double digit gaining] calendar years makes it difficult to draw conclusions for the upcoming year but we found that the market was able to sustain gains following similar gains for all rolling two-year holding periods historically. More specifically, the S&P 500 delivered gains for a majority (58%) of the time with an average return of roughly 6%. In addition, double-digit gains occurred 33% of the time, while double-digit losses only occurred 8% of time. In other words, significant gains outnumber significant losses by three to one margin. Therefore, we believe these additional historical data points lend further support… S&P 500… The S&P/TSX took a breather in December, declining… on a price return basis during the month. This decline comes after the market rallied for five consecutive months leading into December… and hitting new all-time highs. Indeed, the TSX was up… despite broad economic and market concerns in the earlier part of the year. Yes, 2024 started soft for the TSX, which posted modest returns in the first half as the market digested economic and interest rate concerns. However, as the Bank of Canada took a more aggressive stance, confidence started to return and valuations pushed back above long-term averages. Additionally, the second-half rally was broad based.”
Stocks in your portfolio that made a new 52 week high this past month: Fortis*, MasterCard*, Royal Bank*, S&P 500 Index, (Bank of Nova Scotia*, Brookfield Corp*, Sun Life*, Waste Connections*)
Stocks in your portfolio that made a new 52 week low this past month: CN Rail*, Kraft Heinz, Johnson & Johnson, (BCE, CPKC), TD Bank*, Telus*, United Parcel Services*
The Loonie declined by two and a half cents versus the U.S. dollar to $0.695
Happy New Year. We wish you all the best health, happiness, and success in 2025 and beyond.
Thank you,
Ian, Gab, Kaitlyn and Nataliia