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Investment update Q2 2024

Market performance

The second quarter had its fair share of high-flying moments with AI chipmaker Nvidia overtaking Microsoft as the most valuable listed U.S. company with a market capitalization of US$3.335 trillion (though it stumbled at the end of June). Amazon also generated headlines when it became the fifth U.S. company to cross the US$2 trillion market-cap milestone as it joins the AI frenzy. The S&P 500 and the Nasdaq both benefitted from the tech rally with quarterly gains of 4% and 8%, respectively. Canada’s TSX hit record highs in May, but weak performance in the Canadian tech sector weighed on the benchmark’s overall performance. The Dow Jones Industrial Average crossed the 40,000-point milestone for the first time ever, but also lagged the more tech-heavy U.S. indexes.

The meme stock craze also had a brief resurgence in May when shares of AMC and GameStop skyrocketed over 135% and 270%, respectively. Similar to what transpired in 2021, the rabid trading, with investors exchanging more than US$3.4 billion worth of GameStop shares over a two-day period, was kick-started by 37-year-old Keith Gill, known online as Roaring Kitty, who returned after a three-year hiatus.

But the Bank of Canada’s decision in early June to cut its key policy rate for the first time since March 2020 was the biggest news domestically. Canada’s central bank became the first in the G7 to pivot toward a cut, ending a historic period of monetary policy that saw interest rates climb to 5% as Canadians grappled with soaring inflation. In his accompanying statement, Bank of Canada Governor Tiff Macklem said: “We’ve come a long way in the fight against inflation. And our confidence that inflation will continue to move closer to the 2% target has increased over recent months. The considerable progress we’ve made to restore price stability is welcome news for Canadians.”

In April, the Liberal government also tabled its 2024 federal budget, titled “Fairness for Every Generation.” In addition to introducing tax reforms, the budget proposed measures to address housing affordability and the cost of living, with a focus on supporting younger Canadians. In the U.S., inflation showed signs of cooling through April and May, but the U.S. Federal Reserve (the Fed) has continued to hold its policy rates in the range of 5.25% to 5.50%, where they have been since July 2023. The Fed’s updated projections now only include one interest-rate cut in 2024 versus the three they had penciled in as recently as March.

The stock and bond market*

Index Close Q2 YTD
S&P/TSX Composite 21,875.79 -1.31% 4.38%
Dow Jones Industrial Average 39,118.86 -1.73% 3.79%
S&P 500 Index 5,460.48 3.92% 14.48%
NASDAQ Composite 17,732.60 8.26% 18.13%
10-year Canadian Bond Yield 3.47% 0.02% 0.37%
10-year U.S. Treasury Yield 4.36% 0.16% 0.48%
WTI Crude Oil (US$/barrel) $81.54 -1.96% 13.80%
Canadian Dollar US$0.7310 -1.03% -3.19%
Bank of Canada Prime Rate 6.95%

*Performance ending June 30, 2024. Sources: Bloomberg.

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The Investment Analyst team at Co-operators provides expert economic insight, portfolio construction and recommendations to support our wealth management services. Read their insights on the major factors that impacted markets in Q2.

Q. As we begin to put the pandemic and its economic fallout in the rearview, can we identify any takeaways?

A: Equity markets have demonstrated impressive resilience, quickly shrugging off the COVID-19 pandemic and an unprecedented rise in interest rates. Investors must be weary of trying to time the market or holding significant cash balances and veering away from their long-term financial plan. Looking back, major equity markets peaked on February 19, 2020, before tumbling over 25% in the U.S. and over 30% in Canada, when the pandemic started. Despite rising unemployment and other economic disruptions, the U.S. indexes eventually recovered and went on to set new highs. As of the end of Q2 2024, the U.S. stock market is now up over 73% from its pre-pandemic level, and this has been during a period of high inflation and rising interest rates. Bull markets often outlast bear markets by a large margin, making it difficult to time the market. This underscores the importance of investors resisting emotional biases and remaining focused on their long-term investment strategy to achieve their goals.

S&P 500 Total Return in U.S. dollars: January 2020 – June 2024

S&P 500 Total Return in U.S. dollars: January 2020 – June 2024 This line graph shows the S&P 500 Total Return in U S dollars from January 2020 through June 2024. The x axis marks each year going from 2020 on the left to 2024 on the right. The y axis shows the Total Return going from four thousand points at the bottom to nearly twelve thousand at the top. The line fluctuates frequently but gradually rises as it moves along the x axis. There’s a notable drop at the start of the pandemic. A label on the graph explains that the space from the pre-pandemic peak level to the top of graph represents a 73.16% increase. That is 13.5% annually.

Source: Bloomberg

 

Q: Inflation and interest rates remain in the spotlight. What other data points or trends are you watching, and why?

A: We need to look at a variety of macro-economic factors to judge the condition of Canada’s general economic health. Unemployment is a particular metric that has stood out in the last few years as policymakers tackled decades-high inflation, coupled with historically low unemployment and steady wage growth numbers (making inflation sticky). But in recent months, we’ve seen the unemployment numbers gradually tick up as job creation has been outpaced by population growth (though not at an alarming rate). Another factor we’re keeping an eye on is Gross Domestic Product (GDP). In 2023, GDP growth stalled in Canada but has since picked up in 2024. On the flip side, real GDP per capita has slowed to pre- pandemic levels, which can be attributed to the population growth. Rising unemployment numbers, declining real GDP per capita, along with the disinflationary progress we have seen this year, all point to a softening in the Canadian economy – these important variables no doubt contributed to the Bank of Canada’s interest-rate cut in June. The incoming data points to a soft landing for the Canadian economy, which is good news for the financial markets.

 

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