Optimism and Challenges in Global Markets
The financial landscape of 2024 offered a dynamic blend of exceptional gains, geopolitical twists, and cautious optimism. Martin Lefebvre, Chief Investment Officer at National Bank Investments, delivers a comprehensive post-mortem of a year that confounded expectations and carved a path forward into 2025. Through ten illuminating charts and a balanced strategy, Lefebvre contextualizes a year that was anything but ordinary.
The Equity Surge and a Resilient Economy
“Optimistic investors prevailed,” Lefebvre notes, as global equity markets posted above-average gains for the second consecutive year. The S&P 500 emerged as the star performer, delivering returns of over 25%, driven by the “colossal and ever-growing weight of its tech giants.” Dubbed the “Magnificent Seven”—Apple, Microsoft, Google, Amazon, Nvidia, Meta, and Tesla—these firms accounted for a staggering 35% of the S&P 500 and 19% of the global equity market. Lefebvre remarks that their dominance underscores the broader economic momentum in the U.S., where GDP growth consistently exceeded potential forecasts across nine of the past ten quarters.
A Recession That Wasn’t
Summer brought turbulence as the U.S. unemployment rate spiked, triggering the Sahm Rule—a historically accurate recession indicator. Lefebvre acknowledges this “major source of concern,” yet highlights the labor market’s subsequent stabilization. By year-end, a volatile but favorable backdrop allowed for a new cycle of monetary easing. Inflation slowed significantly, with the U.S. maintaining levels below the 2% target for much of the year, while Canada stayed below this threshold throughout.
Canada: A Mixed Bag of Outcomes
On the northern side of the border, Lefebvre describes a more challenging picture. The Canadian economy faced pronounced weakness, prompting steeper rate cuts from the Bank of Canada compared to the Federal Reserve. These divergent monetary policies widened the rate differential to 1.25%, the largest gap since 2004, leading to an 8.6% depreciation of the Canadian dollar against the U.S. dollar. Despite this, Canadian equities performed robustly, with the S&P/TSX gaining 21.7% for the year, bolstered by sectors like financials (+30.1%) and energy (+24.0%).
Geopolitical and Political Undercurrents
The geopolitical landscape added layers of complexity. Middle East tensions and the victory of Donald Trump in the U.S. presidential election introduced fresh uncertainties. Lefebvre points out that while Trump’s “America First” policies stirred concerns about potential tariffs, markets appeared hopeful that modest levies would fund corporate tax cuts rather than disrupt trade flows.
Asset Class Breakdown: Opportunities and Risks
- Fixed Income: Canadian fixed-income markets posted their second consecutive year of gains, though performance was uneven. Corporate bonds led the way (+7.1%), while long-term bonds lagged (+1.2%). Lefebvre recommends a slightly longer duration to hedge against potential recessions and remains cautious on corporate bonds due to narrow credit spreads.
- Equities: U.S. equities dominated, with technology, communication services, and consumer discretionary sectors outperforming. However, Lefebvre advocates a diversified approach, favoring quality companies in the U.S., Japanese equities, and large caps in emerging markets.
- Commodities and Currencies: Gold mirrored the S&P 500’s performance with a 27.1% gain, while oil prices rebounded modestly (+0.8%). Lefebvre highlights the Canadian dollar’s struggles, weighed down by both domestic economic fragility and a robust U.S. dollar.
Looking Ahead to 2025
As central banks move toward neutral policy stances, Lefebvre outlines a cautiously optimistic outlook. He emphasizes the importance of a balanced portfolio, integrating alternative assets to enhance diversification. “While a soft landing seems the most likely scenario, investors face high valuations, a fragile economy, and heightened political uncertainty,” he warns. His tactical asset allocation favors North American equities, inflation protection, and an overweight in safe-haven currencies like the U.S. dollar and Japanese yen.
The Magnificent Seven: A Double-Edged Sword
The growing influence of the Magnificent Seven represents both opportunity and risk. Their outsized contribution to market returns raises concerns about concentration risk and broader market vulnerability. Lefebvre’s analysis urges vigilance, noting that diversification across sectors and geographies remains a cornerstone of sound portfolio construction.
Conclusion
Lefebvre’s insights reveal a financial ecosystem at a crossroads: bolstered by surprising economic resilience yet shadowed by geopolitical and valuation risks. His balanced strategy, grounded in diversification and cautious optimism, provides a roadmap for navigating 2025. As he aptly concludes, “Expectations are high, and the political fog is thick between Mar-a-Lago and Washington.” Investors would do well to heed both the opportunities and uncertainties that lie ahead.
This year-end reflection underscores the imperative for adaptability in a world where the only constant is change. Whether leveraging the momentum of U.S. equities or hedging against geopolitical risks, Lefebvre’s approach offers a pragmatic lens for navigating a complex and evolving investment landscape.
Copyright © AdvisorAnalyst, National Bank Investments
