1) INTRODUCTION:
François Doyon La Rochelle:
You’re listening to Capital Topics, episode #71!
This is a monthly podcast about passive asset management and financial and tax planning ideas for the long-term investor.
Your hosts for this podcast are James Parkyn and me François Doyon La Rochelle, both portfolio managers with PWL Capital.
In our podcast today we will review the global capital markets performances for 2024.
Enjoy!
2) 2024 CAPITAL MARKET YEAR IN REVIEW: ANOTHER SPECTACULAR YEAR!
François Doyon La Rochelle:
Before we start, since this is our first podcast for the year, I would like to wish our audience a happy, healthy, and prosperous year in 2025.
James Parkyn:
Yes, indeed François. Happy New Year to all of our listeners and their families. Wishing them all the best.
François Doyon La Rochelle:
Now to our day's topic and as usual, we will start the year with a review of the global capital market’s performance for last year, 2024. As in prior performance review episodes, I will mostly be pulling performance data points from our market statistics page, a document you can find on our website Capital Topics in the resources section, or directly on our team’s page on the PWL Capital website. We believe it is a valuable tool to follow today’s discussion and to review and assess the performance of your portfolios.
James Parkyn:
For our listeners, I remind them that you can also find the performance of our model portfolios on the Capital Topics website in the resources section or on our team’s page on the PWL Capital website. We will provide a link for both with this podcast.
François Doyon La Rochelle:
Indeed James, now let’s move on to our topic. So, after a powerful year in 2023, stock markets in 2024 built on the positive momentum of 2023 and showed remarkable resilience posting double-digit returns in all the stock markets we invest in. As usual, at the start of the year, uncertainties were plentiful. Pundits were again forecasting difficulties for the markets citing economic and geopolitical worries as tensions remain high with the war in Ukraine, the expanding conflict in the Middle East, and the sustained threats of China over Taiwan. Furthermore, the upcoming presidential election in the U.S. was also a big concern going into 2024 given the deep division in the American electorate.
James Parkyn:
Yes, as you mentioned François, there was plenty to worry about. Still, despite all the uncertainties, 2024 ended out being an exceptional year for investors proving once again that most market pundits forecasts were wrong. On that note, Nicolas Bérubé from the French-Canadian newspaper La Presse published an interesting article on December 29th entitled “Let's laugh at the economic predictions of 2024”. In his article, Mr. Bérubé lists the predictions for the S&P500 Index from several major global financial institutions. And let me tell you, out of the 20 or so institutions listed none of the predictions were correct. About half of them predicted a negative or flat year for the S&P500 Index and none of them came close to predicting the actual returns delivered by the index for the year.
François Doyon La Rochelle:
That was an interesting article indeed but, every year it’s the same story, most market pundits get it wrong, and no one can predict markets. On the economic front, the most important development is that the Central Banks were successful in taming inflation as most of them were able to start cutting interest rates in response to lower inflation numbers. In Canada, the inflation rate has dropped from 3.4% to 1.9%, in the U.S. from 3.4% to 2.7% and in the Euro Area from 2.9% to 2.4%. I think it’s fair to say now that inflation rates are under control as rates are much closer to the 2% inflation target aimed by most central banks. However, from my readings, worries on the inflation front are still present in the U.S. due to the inflationary policies of the Trump administration.
James Parkyn:
François, I would add the uncertainty arising from the chaos related to measures proposed by the incoming Trump administration, including impulsive deregulation, tax cuts, and tariffs. Many economists predict these measures could push inflation higher in the future. This being said, as you mentioned earlier François, given the lower inflation rates experienced last year, most central banks were able to cut their key interest rates. The Bank of Canada cut its target overnight rate five times from 5.00% to 3.25%, the US Federal Reserve reduced the Federal Funds Target Rate three times from 5.50% to 4.50% and in the Euro Area the key interest rate was cut from 4.5% to 3.15%.
François Doyon La Rochelle:
To conclude on the economy, I think it is fair to say the Central Banks were successful with their interest rate tightening cycle since they were able to tame inflation and avoid pushing their respective economies into a recession. On that front, gross domestic growth rates were modest in 2024, In the U.S., the GDP growth rate declined modestly from 3.2% to 2.7%, in Canada GDP grew from 1.1% to 1.5% and in the Euro Area, it grew from 0.1% to 0.9%. In China, the growth rate of GDP is far from where it was historically, but GDP was still growing 4.9% annually in 2024.
James Parkyn:
François, I agree with you, I think the Central Banks were successful in taming inflation and more importantly, contrary to predictions, managed soft landings. Going forward, the Fed and the Bank of Canada have both signaled fewer and smaller rate cuts. This is particularly true for the U.S. since their economic growth is still strong, their inflation rate albeit lower than a year ago is still above the target of 2% and recent numbers for job creation have been very strong.
François Doyon La Rochelle:
You’re right James, now let’s look at the market statistics for 2024. Again, as a reminder our market statistics can be found on our Capital Topics’ website and in our team’s section on the PWL Capital website. We will provide the link for the market stats with the podcast page.
Let’s start with the fixed income. Returns in the Canadian bond market were quite good last year Canadian short-term bonds were up 5.7% for the year and the total bond market, which holds longer-dated maturities was up by 4.23%. With the Bank of Canada lowering its benchmark rate and bond prices going up, the yield to maturity on these two indexes came down last year. The Canadian short-term bond index currently yields 3.3% and the total bond market currently yields close to 3.7%.
James Parkyn:
Francois, I believe we can now say that rates here in Canada and the U.S. have normalized as the interest rate yield curves are now upward-sloping as opposed to being inverted. I also believe that investors and borrowers should prepare themselves for higher interest rates as the Central Banks may be coming to the end of lowering interest rates, barring some unforeseen economic crisis.
François Doyon La Rochelle:
James, you mentioned the inversion of the yield curve. This may be jargon for some listeners, could you explain further?
James Parkyn:
Agreed François, an inverted yield curve occurs when the interest rates on short-term bonds are higher than interest rates on longer-term bonds of the same credit quality. In the past, this has proven to be a relatively reliable indicator of an economic recession to come. However, it did not predict a recession in this cycle. Now the yield curve shows that interest rates are lower for short-term bonds and higher for longer-dated bonds. This gives an upward sloping curve which many economists interpret that rates have now normalized. To give our listeners an idea of where interest rates are, we look at the benchmark 10-year Government bonds. In Canada, they ended the year at 3.3% which is 0.8% or 80 basis points above the recent 20-year average of 2.5%. In the U.S., the yield on the 10-year Treasury note ended the year at 4.6% which is 160 basis points above the 20-year average of 3.0%.
François Doyon La Rochelle:
With inflation rates coming down and the higher interest rates on bonds, investors are now being fairly compensated to hold them.
James Parkyn:
What about equities François, what can you tell us?
François Doyon La Rochelle:
As I mentioned earlier, it was a banner year for equities in 2024, all the main global indexes we follow had double-digit returns for the year and it’s the second year in a row that the majority of them performed that well.
James Parkyn:
So how did the Canadian equities do?
François Doyon La Rochelle:
In Canada, the total return for the S&P/TSX Composite Index was a strong 21.65% reaching multiple new record highs along the way. This strong performance was broad-based since 10 of the 11 sectors had positive performance. Similar to 2023 the information technology sector led the way with a performance of 45.1%. It was followed by financials with a performance of 31.6% and materials at 27.3%. The only sector with a negative performance last year was Telecoms with a performance of -16.2%.
James Parkyn:
Yes, and the worst one in the telecom sector was the largest and historically the safest BCE with its high dividend yield. François, since the information technology sector was the big winner, many listeners may believe that growth stocks outperformed value last year in Canada.
François Doyon La Rochelle:
Surprisingly not James, large and mid-cap growth stocks had a performance of 19.9% compared with a performance of 26.0% for value stocks. As for the small-cap stocks, they also outperformed large and mid-cap stocks with a performance of 21.91%. Just a reminder here for our listeners that we always highlight the value and small-cap stock performances because, in our client’s portfolios, we tilt towards these two asset classes primarily using funds from Dimensional.
James Parkyn:
Yes, François. I would add to our listeners that it’s important to understand that we tilt away a part of our portfolios from broad market capitalization indexes towards value and small-cap stocks because these stocks have higher expected returns in the long term. So now François, let's discuss what happened in the U.S. equity markets.
François Doyon La Rochelle:
Well, again we had very impressive gains in the U.S. equities. The total U.S. market gained 23.81% in U.S. dollars, in CDN dollars since the CDN dollar lost ground against the U.S. dollar the performance was quite stronger at 34.31%. The momentum in large and mid-cap growth stocks continued, they were up by a remarkable 44.67% last year, that’s in Canadian dollars. Large and mid-cap growth stocks continue to dominate value stocks that generated 24.07%, in Canadian dollars.
James Parkyn:
Well, François, large and mid-cap growth stocks and especially the 7 mega-cap stocks continue to dominate. The performance of the value stocks is not too shabby either at 24%. On that point, I think it’s fair to say here that the outsized returns of growth stocks are the anomaly. Value stocks at 24% are not underperforming.
François Doyon La Rochelle:
I agree with you James, large and mid-cap growth stocks have delivered outsized returns. Looking at our market statistics page, they have generated a return of close to 12% (in CDN dollars) over the last 30 years, that’s an astonishing return. This return is way above long-term expected returns. What investors need to be mindful of is that valuations on large and mid-cap growth stocks are becoming very stretched by historical standards.
James Parkyn:
I agree with that comment François. Is there anything else you would like to add about the 2024 performance of U.S. equities?
François Doyon La Rochelle:
Well James the story in the U.S. last year was continued momentum in the artificial intelligence (A.I.) stocks. The communication services and technology sectors were the best-performing sectors. They were led mostly by the performance of the Magnificent Seven stocks.
James Parkyn:
For our listeners, the Magnificent Seven stocks are comprised of the seven largest U.S. stocks by Market Capitalization. The Seven include: Alphabet (Google), Amazon, Apple, Meta Platforms (formally known as Facebook), Microsoft, NVIDIA, and Tesla.
François Doyon La Rochelle:
Correct James, and as a group, their performance averaged 60.5% last year. The best-performing stock in this group was NVIDIA with a performance of 171% and the worst performer was Microsoft with a return of 12%. Microsoft was the only one that underperformed the broad U.S. market last year. Dimensional did a deep dive on the S&P500 stock returns and excluding the Magnificent Seven, the other 493 stocks generated only 12.8% in U.S. dollars. The market cap weight of these seven stocks continued to grow last year. They now represent 34% of the S&P500 Index and close to 19% of the MSCI all-country index.
James Parkyn:
François, these stocks have done so well that I’m not surprised by their current dominance in capital market indexes. The question here François is should we be worried?
François Doyon La Rochelle:
James, I don’t know if we should be worried, concentration amongst mega-cap stocks has occurred in the past but maybe not to this magnitude. What I can say for sure however is that investors need to stay diversified globally to reduce this concentration. I think the tilts toward value and small-cap stocks that I mentioned earlier are also a good way to alleviate some of that concentration risk.
James Parkyn:
François it was the second year in a row that the S&P500 Index generated a return above 20% since 1997-1998. What does that tell us about the returns for 2025?
François Doyon La Rochelle:
James, are you trying to trap me in making a market prediction for 2025?
James Parkyn:
Absolutely François!
François Doyon La Rochelle:
Well James, you know I won’t step into the trap of trying a crystal ball forecast. However, Ben Carlson, in his blog A Wealth of Common Sense, commented on this specific topic. What he stated in his blog is that since 1928 there have been three instances when the S&P500 Index had back-to-back returns above 25%. It happened in the 1930s, the 1950s, and in the 1990s. The ensuing annual results were what he called terrible in 1937 when the S&P500 returned a negative 35%, decent in 1956 when it returned 7%, and great in 1999 when it returned 21%. So, his point is past market history is not very helpful.
James Parkyn:
Okay, François. Let’s discuss what happened in developed and emerging market stocks.
François Doyon La Rochelle:
The internationally developed markets also had a good year, not as good as in North American equities but still good. Large and mid-cap stocks returned 11.28% in local currency, in Canadian dollars, returns were roughly 1.3 percentage points higher at 12.63%. However, as opposed to the U.S., International large and mid-cap value stocks have outperformed growth stocks returning 14.65% compared to 10.7% for growth stocks. Small-cap stocks also did well but trailed large and mid-cap stocks with a performance of 10.45%.
The Emerging Markets had an even better year with large and mid-cap stocks returning 17.22%. Large and mid-cap growth outperformed value and small-cap stocks trailed large caps.
To conclude on international equities, our listeners will recall that I mentioned earlier in the podcast the conflict in the Middle East and the tensions between China and Taiwan, well it may be surprising for our listeners, but Israel and Taiwan were the two best-performing international market indexes last year with respective performances of 46% and 40%.
James Parkyn:
François, now that we know what happened in Capital Markets in 2024, what is your advice for our listeners?
François Doyon La Rochelle:
Well James there is no secret, what investors need to do first is to take profits and rebalance their portfolios towards their long-term asset mix. This favors capital preservation because you will be selling your volatile equities to purchase bonds which are the stabilizer in your portfolio. This will help bring back your portfolio to a risk level you can tolerate. Don’t forget also to rebalance within the equity component. U.S. equities have done so well that they may be overweight relative to Canadian, international, and emerging market equities. To finish, remember that in the long-term equity markets will deliver positive returns but that historically equity markets are down roughly 25% of the time. Will 2025 be one of those years, I don’t know, the only thing I know for certain is that markets will be volatile in the future as they always were.
James Parkyn:
Thanks for the update, François. We remind our listeners that they should have an “Investor Mindset” and continue to buy and hold investments with an owner’s mentality. Stay disciplined and focused on the long-term and avoid being deterred by the short-term noise.
3) CONCLUSION
François Doyon La Rochelle:
Thank you, James Parkyn: for sharing your expertise and your knowledge again today.
James Parkyn:
My pleasure. François.
François Doyon La Rochelle:
That’s it for episode #71 of Capital Topics!
Do not forget, if you would like to submit questions or suggestions for the show, please email us at: capitaltopics@pwlcapital.com
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Again, thank you for tuning in and please join us for our next episode to be released on February 19th. In the meantime, make sure to consult the Capital Topics website for our latest blog posts.
See you soon.