A year ago, we squinted a bit, scratched our heads and tried to discern where things were going with interest rates, the economy, the stock market. Just the simple stuff (cue laugh track). So, we thought it might be fun, as a public service, to do a quick survey a year later of a few key metrics and trends.
A DIRECTIONAL SHIFT IN CANADIAN INFLATION AND INTEREST RATES
Interest rates. The Bank of Canada (BoC) cranked its key rate up three times in 2023, plateauing at 5% in July (a year earlier, in June 2022, it was 1.5%). Inflation, and the economy, gradually slowed over the next 12 months, and in June this year, the BoC trimmed its policy rate to 4.75%. Variable rate mortgage holders were seen dancing in the streets. The pullback also helps fixed rate mortgage borrowers who will renew in the next 24 months at much higher rates than they currently pay. There might be another .25% cut this year, depending on, yes, inflation and growth.
Inflation. Everyone’s favourite data point drifted lower in the first four months of 2024, but unexpectedly ticked up in May to 2.9% from 2.7% in April. The BoC wants inflation squarely below 3%, ideally right around 2%. Overall, a welcome improvement from 4.1% in 2023 and the ugly 6.8% in 2022. We’re heading in the right direction.
Economic growth. It slowed in 2023, with GDP posting a lean 1.2% annual gain. Things perked up a bit in Q1 2024 at 0.4% (so 1.6% annualized) but that subdued performance plus falling inflation helped the BoC make its June rate cut. April data was slightly better. From 2000 to 2023, the average annual GDP expansion was about 2%. TD Economics is forecasting sub 2% GDP growth through 2025. Not great, not terrible, but not very inflationary.
Unemployment. It’s up. A year ago, it was at 5.5%. At the midpoint of 2024, it’s at 6.4%, and could float higher if growth remains weak. Rising unemployment is never good but since 2000, the average annual rate has been 6.9%. Could be better but could be a lot worse.
STRONG U.S. EMPLOYMENT COULD DELAY RATE CUTS
The U.S. economy remains strong—strong enough, anyway, for the Federal Reserve to sit tight on interest rates, which have hovered between 5.25% and 5.5% since July 2023. GDP growth rumbled higher in the second half of 2023 and at 2.5% for the year doubled ours, but then slipped to 1.3% (annualized) in Q1 2024. Inflation fell throughout 2023 and Q1 2024, and fell more than expected in June, to 3%, down from 3.3% in May. But the U.S. unemployment rate remains near a 55-year low (!), even after ticking up to 4.1% in June from 4% in May, and 3.9% in April. (Interestingly, 49% of Americans believe unemployment is at a 50-year high. See: food for thought, below). Some growth, inflation still above the Fed’s goal and a solid labour market in the first half of 2024 made the odds of a rate cut this year a coin toss. But the softer June data, if it lasts, just might pave the way for the Fed to trim in September.
AI FRENZY SKEWS U.S. STOCK MARKETS
There’s this new thing called artificial intelligence that everybody is pretty amped about. In case you’re wondering, this sentence was written by a human. So was this one. And just like last year, human investors are flocking to AI, and AI, in turn, is swinging the markets. Exhibit A: The S&P 500 Index. This bellwether of corporate America is up 15% year-to-date and 25% since June 30, 2023. For contrast, look to the AI-free Canadian stock market. The S&P/TSX Composite Index is up 4.8% for the first half and 10.4% since June 30, 2023.
But AI mania is seriously distorting those U.S. results. Just three of the 500 companies in the S&P 500 Index—Microsoft, Nvidia, and Apple—account for 20% of its total value. Add Meta and Alphabet and it’s 27%. And in case you were out of town or working an 80-hour week (yes?) and missed it, shares of AI chip maker Nvidia are up 160% in 2024. One U.S. research firm has estimated that if you strip out AI companies, the S&P 500 would be 20% lower. Will AI change our world? Probably. Did the internet change everything? Without question. Were there winners and losers of the great dotcom bubble of the late 1990s? Oh, gosh yes. Is AI a bubble? TBD.
SOME FOOD FOR THOUGHT…
- Percentage of Americans who think the U.S. is in a recession: 56%
- Percentage of Americans who think the S&P 500 is down this year: 49%
- Percentage of Americans who think U.S. unemployment is at a 50-year high: 49%
- Average Canadian consumer debt in Q1, 2024, excluding mortgages: $21,296
- Highest and lowest, by province: $24,157 (Alberta), $17,527 (Manitoba)
- Number of Canadians who missed a mortgage payment in Q1 2024: 34,000, up 22.7% from a year ago.
- Number of Canadians who missed at least one type of credit payment in Q1 2024: 1,260,000, up 12.2 % from Q1 2023.
- Percentage of Canadians who feel hopeful about their financial future in Q1, 2024: 50%
- Same question a year ago: 47%
- Percentage of Canadians who took action to improve their finances in 2023: 46%
- Top three tactics: 1) paying off credit cards, 2) consolidating debt and making progress paying it down, 3) making a retirement savings plan.
OUR TWO CENTS (ADJUSTED FOR INFLATION)
The journey back from the economic and personal damage of the pandemic isn’t over. Geopolitical tensions that spurred sharp spikes in energy inflation in 2020 are lingering. Geopolitics are also keeping global supply chains in a state of flux. There are consequential elections this year. And we all continue to feel the often-harsh impact of inflation. Will central bankers guide us to a soft landing, or will new storm clouds appear? Either way, making a financial plan for navigating your own way forward is a smart—and easy—way to find your own answers to just about every financial question.
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Book a pro bono meeting with a certified financial planner, and ensure that your financial plan is clear, even when the markets aren’t.
Written for Lawyers Financial by Chris Goldie. Chris Goldie is a Toronto-based writer and editor.
