What will the rest of 2024 bring for bonds, equities and your portfolio?

Generally speaking, rate cuts make it cheaper for businesses to borrow money and therefore encourage spending. This could theoretically put upward pressure on stock prices. “Equity markets have rolled on quite nicely so far,” says Tudor Padure, Vice-President, Equities, CIBC Asset Management. This positive performance may continue if rate cuts stimulate further market activity.

In terms of fixed-income investments, rate cuts are potentially the most important factor to keep an eye on, says Aaron Young, Vice-President, Client Portfolio Manager, Fixed Income at CIBC Asset Management. Since bond prices tend to have an inverse relationship with interest rates, when interest rates rise, which is what we saw last year, bond prices go down — and vice versa. Young expects that the Bank of Canada (BoC) will continue to cut rates in the second half of 2024.

The uncertainty around the outcome of the U.S. election in November is likely to cause market volatility for bonds and equities alike. 

“I would argue investors need to look past that short-term noise,” Young says, emphasizing the short-term nature of the election period when it comes to fixed income markets.

Padure echoes this sentiment when it comes to equity markets. “We think investors are better to look through it. Will it bring some volatility? Likely. But we don’t think any of the megatrends are going to change,” he says.

The 2024 federal budget introduced significant changes, including a new capital gains inclusion tax effective June 25. “We would not be surprised if we saw an increase in activity or a willingness to divest either assets or full companies in Canada,” Padure says. While any preemptive selling will have already occurred in June, there is potential for longer-term impacts such as consolidation and acquisitions in fragmented markets made up of smaller mom-and-pop type businesses. “One industry that’s come to mind is the self-storage industry. We actually have seen in the past very similar changes spur activity,” Padure says.

Additionally, the higher deficits outlined in the budget could make bonds more attractive. “Budget increase deficits at the federal and provincial level mean more issuance for government bonds, which generally can have an upward pressure on overall yields,” Young says.

Advancements in artificial intelligence (AI) have made it a prominent force in the world of equities. “We believe firmly that we are in the very early innings of a long-term secular growth trend that's driven by generative AI,” Padure says. While directly investing in AI companies is one opportunity for investors to get exposure to this technology, it’s also important to consider companies that are integrating AI into their operations.

The financial sector makes up about 30% of the S&P/TSX Composite Index, making it an important consideration for equity markets. Although Canadian banks are trading relatively in line with their long-term, historical average on a price-to-earnings basis, Padure says, “We see some near-term headwinds, including slowing loan growth and higher regulatory requirements.”

Banks have been mandated to hold much higher amounts of capital. “That's hurting their return on equity,” Padure says. “We continue to prefer insurance companies to banks right now and specifically specialty insurance. They're able to grow at a faster clip. And they have much higher returns on equity. That means they're able to reinvest the excess capital they generate at attractive rates of return.”

While considering short-term market movements, it’s important to keep focused on your long-term investing goals. Your advisor can help you navigate the current economic environment and answer questions you may have about your investment portfolio.