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Investment update Q3 2024

Market performance

The quarter opened on a high note with all North American equity markets extending year-to-date gains. And it ended much the same way, with the four benchmarks reaching record highs. But in the weeks between, investors experienced a much higher level of volatility than through the first two quarters of the year.

Trouble surfaced in late July, when AI-related stock rallies stalled over concerns that U.S. regulators would crack down on companies that were selling advanced semiconductor technology to China. Disappointing corporate earnings from major U.S. tech firms compounded the problem and sent the Nasdaq and the S&P 500 spiralling down a combined 8.5% over two weeks.

In mid-August, the indexes recouped those losses after inflation data from Canada and the U.S showed that consumer prices continued to fall. In the U.S., this data, along with indications of a softening labour market, fuelled expectations that the Federal Reserve (the Fed) would start cutting rates in September. The Fed followed through with an outsized 50-basis point rate cut on September 18 (to a range of 4.75% to 5%), but only after the markets withstood another major selloff. The first week of September saw AI and tech-related stocks – which are typically the most interest-rate sensitive – in the crosshairs again. Nvidia’s stock plummeted 10% (a market-cap loss of US$279 billion), leaving Apple, Amazon, Alphabet and Microsoft all caught in its wake.

The Fed’s September rate cut, though, was certainly the spark that set off a multi-week rally, helping the Wall Street benchmarks end the quarter with gains ranging from 2.5% to 8%. The Bank of Canada also delivered two rate cuts in Q3, and Governor Tiff Macklem left the door open for more cuts in Q4. He told reporters: “If inflation continues to ease broadly in line with our July forecast, it is reasonable to expect further cuts in our policy rate. We will continue to assess the opposing forces on inflation and take our monetary policy decisions one at a time.” Canada’s TSX outpaced its U.S. counterparts, ending the quarter with a 9.71% gain through the three-month period ending September 30.

The stock and bond market*

Index Close Q3 YTD
S&P/TSX Composite 24,000.37 9.71% 14.51%
Dow Jones Industrial Average 42,330.15 -8.21% 12.31%
S&P 500 Index 5,762.48 5.53% 20.81%
NASDAQ Composite 18,189.17 2.57% 21.17%
10-year Canadian Bond Yield 3.01% -0.49% -0.09%
10-year U.S. Treasury Yield 3.81% -0.55% -0.07%
WTI Crude Oil (US$/barrel) $68.17 -16.40% -4.86%
Canadian Dollar US$0.7394 1.15% -2.08%
Bank of Canada Prime Rate 6.45%

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

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Grow your market knowledge

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 Q3

Q. Central banks started easing monetary policy in Q3, as inflation returned to target. What impacts could this have on market performance in the weeks ahead?

A: As yields tend to be positively correlated with central bank policy rates, we expect a decline in returns for safe-haven, cash-equivalent investments like GICs and High Interest Savings Accounts. Lower interest rates make these options less appealing, which should prompt investors to explore riskier assets that offer higher returns. If that happens, capital will flow into assets like equities and fixed income. Historically, small-cap and cyclical stocks tend to thrive in this type of environment, as lower borrowing costs fuel business activity and expansion.

The broader equity market could also benefit from lower interest rates, which allows companies to invest in growth, and potentially deliver stronger earnings. As for the bond market, past performance indicates that it should also get a boost, as declining yields increase the value of existing bonds. The monetary policy easing signals a shift toward a risk-on sentiment in the market, with opportunities emerging across a range of asset classes.

Major central banks around the world initiated a rate-cutting cycle


This graph is a line chart. It shows a black line, a red line and a blue line. It charts the interest rate cycle for the Eurozone, Canadian, and U.S. central banks from January to September of 2024. The black line represents the Eurozone, the red line represents Canada, and the blue line represents the U.S. The X-axis shows each month from January to September. The Y-axis starts at 3% at its origin and moves up to 5.50% in increments of 50 points. The black line representing the Eurozone is steady at 4% from January to May. In June it declines to 3.75% where it stays until August. The line moves down again September to 3.50%. The red line representing Canada is steady at 5% from January to May. The line declines steadily to 4.50% through June and July. The line is straight at 4.50% from July to August and then declines to 4.25% in September. The blue line representing the U.S. is steady at 5.25% from January to August. In September the line declines to 4.75%.

Source: Bloomberg


Q: AI-driven rallies cooled off in early September before recovering into the quarter’s close. What contributed to this volatility, and should clients anticipate the choppiness to continue?

A: The positive performance of AI-related stocks in the first half of the year contributed significantly to overall market gains. This left investors wondering if such concentrated growth was sustainable in the long run. Clearly, concerns over profit-taking and stretched valuations in the tech sector played a crucial role in the Q3 pullback. Investors, having enjoyed substantial gains earlier in the year, likely sought to capitalize on their profits by selling at a high, which caused a temporary dip in AI stocks.

With inflation falling back to target range and cracks showing in the labour market, investors grew concerned about the general economic health in the U.S. Many also thought the Fed was late to the game by not starting its rate-cutting cycle in June or July like some other countries. But the Fed’s jumbo-sized 50-basis point cut in September renewed confidence, which is when the major indices hit record highs.

Looking ahead, it’s reasonable to expect some continued volatility as the Fed tries to navigate a soft landing. The U.S. elections in November, along with the release of key economic data – like inflation and employment figures – will also shape expectations and drive market movements. That means that macroeconomic worries are likely to stay, despite the AI-driven optimism. Ongoing geopolitical tensions, whether related to trade disputes or regional conflicts, will also play a role in market performance. As always, it’s important to look past these temporary dips and shifts in sentiment and focus on your long-term goals. Here are 5 strategies for getting through market volatility.

 

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