In a few days we will be in full holiday celebration mode and if you are like me, you are probably saying “it can’t come soon enough”.  Whether it’s sitting by the fire or sitting at the table, next week will offer us an opportunity to laugh, rejoice but also to reflect. The fact that we can do this means that we are blessed, as many of us had to say good-bye to loved ones and friends this past year. In addition to the personal challenges we faced in 2024, there was no shortage of things that impacted global economies and financial markets – some anticipated and some out of left field. As this is our last newsletter of the year, I will review some of the key issues and provide an overview of what 2025 might bring.

I always find it useful and somewhat entertaining to go back to December of last year and see what economists and pundits were thinking. One thing that was not at the top of the agenda was the US election, not because it wasn’t a key factor in the outlook beyond 2024, but because no one envisioned how it would play out, from Trump winning the Republican candidacy without setting foot on a primary debate stage to a couple of assignation attempts and Biden’s eventual exit from the campaign. Then again, I don’t recall many of last year’s outlook publications predicting the first conviction of a past president on felony charges either.

How’s the economy?

For this month's conference call (playback details can be found at the bottom), I discussed how 2025 economic predictions had improved since the November election. This was similar to last year when economists upgraded their assessments of economic growth following the initially disparaging views after US and Canadian central bank rates continued their upward trek from 2022 and hit peaks of 5.5% and 5%, respectively. That said, the upwardly revised estimates turned out to be too conservative. In the case of the US, most analysts saw growth in 2024 in the 1-2% range – a soft landing, but very close to what we refer to as “stall speed”.  Well, as it turned out, we are likely to end this year with US growth close to 3%, though Canadian real GDP growth is probably going to be less than half of that.

As we discussed on the call, the threats to Canada’s economy have escalated since the US election and if 25% tariffs are implemented under Trump 2.0, then growth prospects in 2025 are going to be even more questionable.  This week, we heard from Canada’s premiers that the launch of a tariff attack by Washington could be met with retaliatory measures, including the restriction of energy exports. Clearly, there is a lot to lose on both sides of the border, but the direct hit to Canada’s economy would be disproportionate.

Yes, the more aggressive easing by the Bank of Canada, which has taken our policy rate to 3.25% compared to the 4.5% Fed funds rate south of the border, will provide a boost as we move through the year. Immigration growth, or lack thereof, is not going to be as supportive for demand as in the last three years so this could negate the effects from lower rates. If a worst case scenario unfolds with respect to tariffs and trade, then rates may have to be taken even lower than what the Bank of Canada envisions to be of help.

Inflation victory, or so we thought

Where economists have been more accurate in terms of their 2023 year-end forecasts was on inflation. This time last year, the consensus call for US CPI inflation was in the range of 2.4-2.8% for end of 2024. Markets also believed that Canada would get its inflation rate down close to 2%, but most pushed out the actual achievement of target inflation into 2025. For Canada, this also turned out to be an underestimation, as headline inflation fell to 1.6% in September. Despite a modest bounce in October, we saw it slip back to the 1.8% area in November.

As the above chart shows, US inflation hit a low of 2.4% in September and has risen in the two months since, coming in at 2.8% in November. Whether or not September turns out to be a short-term floor for both countries, or a cyclical low remains to be seen, but it is clear that the Bank of Canada and the Federal Reserve are treating the lack of continued improvement as a risk that, for now, is going to be addressed by pulling back the lever on the pace of interest rate cuts.

This time last year, economists predicted that we might see 3-4 rate cuts by the Fed over the course of 2024 and this consensus call was spot on.  This week’s move of a quarter point to 4.5% took the Fed’s overnight target ceiling rate to 4.5% from the peak of 5.5% this cycle. Market participants felt that the Bank of Canada would have room to also bring down its key rate by a full percent by the end of the year. That call turned out to also be a shy of reality as we head into 2025 with a Bank overnight target of 3.25%. On the assumption that we achieve a soft-landing for both countries next year, economists are of the opinion that it will be difficult for the Fed to replicate the easing seen in 2024 and next to impossible for the Bank of Canada to do so.

Can we make it three?

This time last year, many major investment banks predicted modest gains for the S&P 500, with median year-end targets around 4,800-5,000. Talk about an understatement with a capital “U”. Even with the post-FOMC wobble this week and generally rough month, the S&P was posting a 23% gain year-to-date, driven again by the so-called “magnificent 7”.  The MAG index is actually up north of 7% this month with a whopping lift of 65% since the start of the year. By contrast, the Dow Jones is sporting a much more modest gain of 12.6% on the year so far and the TSX has advanced by just under 17%.

Given the wide range of outcomes that we face in terms of US fiscal policy, inflation and the direction of interest rates, equity forecasts for 2025 are quite irrelevant until we at least get into January. A cursory read of most of the bulge bracket firms, however, talk about gains for the S&P in the 5-10% range.  Based on the current level of around 5900, this would suggest a target of 6500 by the end of 2025. While that is certainly plausible in a scenario with economic growth remains robust, hence driving earnings growth beyond simply the tech sector, we need to be mindful of the fact that this is now the second straight year where the S&P has risen by more than 20% for two years in a row.

Notching a third straight up year wouldn’t be startling.  We saw this, surprisingly, during 2019 to 2021 for one. Yes, a period which contained the worst pandemic in a century and an economic shutdown, saw a string of gains on the S&P500 of 29%, 16% and 27%.  We also saw a 3-year rally in the 2012 to 2014 period. Interesting, had the S&P500 not closed by 0.04 points lower in 2011, there would have been a 6-year string after the 2008 crisis.

What we can say with a reasonable degree of confidence is that if 2025 delivers us a third straight gain in the broader market, it will probably be smaller than what we saw this year.  Second, whether we end next year up or down, the journey will likely be more volatile than what we saw this past year. This time last year, the CBOE VIX index was down close to 12%.  After the spike back in the summer, it looked as though the VIX might head back to below 12% by year-end. That was before this week and as I write, the VIX was in the 19-20% range. I would suggest it will be hard pressed to trade down at the 2024 lows in the months ahead.

Yes, this has been a trying year on multiple fronts and 2025 may not offer up a great deal of rest in terms of the news flow and market gyrations. Hence the need to take all the days we can this holiday season and recharge and refuel.  The most important thing to do is to focus on being healthy and happy. The rest will sort itself out.

In keeping with tradition, I'm pleased to offer this holiday poem (to the theme of Rudolph). 

Steven the bullish trader Has the very best Mets seat

And if you follow baseball You might even say he's bright

All of the other owners, Used to frown and call him names

They never thought poor Steven could turn around a losing team,

Then when Soto got his cheque, The owners came to say

"Steven with the Mets so bright, You might win the ring this year"

Then how the Mets fans loved him, As they shouted out with glee

Steven the bullish trader, You'll go down in history!

On behalf of the Pyle Wealth Advisory team, I want to wish you and your loved ones the best wishes for the holiday season and a very Happy New Year.

Andrew Pyle

Monthly Market Call playback details:

Toll-free dial-in number:     1-800-408-3053

Local dial-in number:         905-694-9451

Recording Passcode:        139691087#

Recording Expiry Date:     17-Jan-2025