Rate cuts boost Q4 stocks amid political turbulence

Canadian equities strengthened in the fourth quarter, though all the gains occurred in October and November. This growth was fueled by a combination of aggressive interest-rate cuts by the Bank of Canada, continued positive economic growth, and strength in the banking sector. However, the picture changed in December, with a sharp sell-off that erased much of the previous gain. The shift reflected the combination of political turmoil, a report showing economic growth turned negative in November, and expectations that the United States would adopt a more protectionist trade policy in the wake of its presidential election. Despite the late downturn, Canada comfortably outperformed its non-U.S., developed-market peers in both the quarter and the full year.

U.S. stocks also rose during the quarter, buoyed by a post-election rally that pushed the broad-based Standard & Poor’s (S&P) 500 Index to a new record. The market began the period on a weak note, declining slightly in October due to uncertainty ahead of the presidential election, a modest rise in inflation and stronger-than-expected economic data that raised concerns about higher borrowing costs. This set up a strong November rally following the vote, as clarity over the new administration, expectations of tax cuts and deregulation, and a quarter-point rate cut by the U.S. Federal Reserve spurred investor enthusiasm. Despite another quarter-percentage-point rate reduction and positive holiday spending trends, stocks retreated in December as investors locked in profits, the central bank lowered its outlook for interest rate cuts in 2025 and inflation crept higher. Within the S&P 500 Index, the consumer discretionary, communication services, and financials sectors were notably strong performers, while the materials and health care sectors were weak.

Global equity markets produced mixed results during the quarter. While broad-based measures such as the MSCI World Index delivered robust performance, most of the gain was the result of strength in the United States. Returns overseas were much more muted, however. Europe and emerging markets lost ground, reflecting slowing global growth and rising protectionism in the United States, while developed Asia posted only modest gains. But despite their uneven performance late in the year, global equities finished 2024 firmly in positive territory.

Global bond markets posted mixed results but declined overall in the final quarter of the year. Bond yields rose in most regions of the world despite interest rate cuts by many of the world’s major central banks, including the U.S. Federal Reserve, the European Central Bank, the Bank of England, and the People’s Bank of China. However, stronger-than-expected economic data in some regions, anticipated economic policy changes by the new U.S. presidential administration, and geopolitical upheaval—most notably in Canada, France, Germany, and South Korea, as well as the Middle East—combined to drive higher yields and bond prices lower.

While yields rose across most maturities, short-term bond yields generally fell, reflecting central bank interest rate cuts. Regionally, North American bond markets declined, European markets posted relatively flat returns, and bond markets in the Asia-Pacific region generated the best returns. On a sector basis, corporate bonds continued to outperform sovereign government securities, led by the high-yield sector.