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Hello everyone, Welcome to Economic Impact. Today is December 10th, 2024 and as usual I am with our Chief Economist, Stefane Marion. Stefane, once again stock market is going up.

Hi, good morning, Denis. It's been a great wealth effect for most households. We know that most portfolios are composed of equities new all-time high on the MSI all country index. So, yeah, it's striking how well the stock market is doing globally.

And is it worldwide or it's only North America phenomenon?

Well, you might not suspect this thing, but if I was to tell you who's what's the best stock market perform where? Where's the country, where the stock markets performing the best so far in Q4?

I saw the slide.

Yeah. OK.

So Canada we're up almost 8% quarter to date, outperforming the rest of the world. Year to date, we have a 24% gain exceeded only by the US at 28%. I can bet you that not many people thought Canada would follow the US as well as it has in 2024.

Stefane, are we catching up in Canada versus the US because our price earning ratio are lower?

Yeah, we spoke to that a few quarters ago saying that it was abnormal to see this discount on Canada versus US on the stock market perspective. So you're absolutely right that there's a catch up phase here. Half of the gains on the S&P TSX this year were accounted by P/E expansion. Yet Denis, despite this catch up, we're still trading at historical discount to the US. So if I was to qualify the Canadian stock market right now, I would not call it overvalued. It's fairly valued, not overvalued for the US it's probably a different connotation.

OK. And now if we go back to economy, the exportation, I think we need to talk about that.

Well, people thought that stock market would be under pressure this quarter because of the potential threats of tariff coming from the US. I know the president-elect spoke to 25%. 25% would be a massive deal on Canada, Denis. Because we have $600 billion of exports going to the US, that's 20% of GDP. So I mean, you know, putting these slapping 25% tariffs on that would seriously fragilized any economy and probably the stock market.

And we can talk about crude oil because people, I don't think they know how much exportation we're doing to the State.

So the reason the market is not buying into the 25% tariff structure is because they know full well that the president-elect has promised the Americans that they would get affordable energy going forward. So if you impose a 25% tariff on Canada, which accounts for 62% of US imports of crude oil, we are now shipping 4 million barrels a day to the US right now. You would certainly ignite inflationary pressures in the US. So that's why the, you know, the components of the Canadian stock market that's performing so well in Q4, aside from the IT sector is the energy sector because the market is saying no, no, no, there's no way Washington could put 25% of tariff without fragilized its own economy.

OK, Stefane, but there's something doesn't add up here, why the Canadian dollar is so low compared to the US dollar despite that.

Well, for some people it's a conundrum because the models are broken because normally you have an historical relationship between the Canadian dollar and the price of oil. We also include, you know, interest rate spreads on that one. So what is striking this time is that the Canadian dollar is so cheap... well, you know, 1.40$ more than 1.40$ versus U.S. dollar and oil is trading at $70.00. We've never seen this combination in the past whenever the Canadian dollar traded at current levels, oil was trading at no more than $30.00. So obviously it's a revenue boon for the energy producers, but from a purchasing power it's quite frustrating. So a lot of people are saying why is the relationship broken between oil prices and the exchange rate?

OK, but how are you explaining that? Is it because of the employment?

Interest rate spread. So economic performance, the relative economic performance in Canada vs US. We're not doing very well right now. The unemployment rate at 6.8% last month versus US at 4.2%. So the markets have jumped on this and they are now saying that we can justify the divergence in monetary policy between the two countries.

OK, what's your call on the next Bank of Canada rate cut or not?

Well, the market is calling 90% odds that they'll be cutting rates 50 points. Yeah, 50 basis points. So we gotta get closer to 3% as quickly as possible. Denis, I want to bring your attention to the fact that this gap in the unemployment rate is the widest we've seen since 2001, so over 20 years. So yes, you can justify this. And so the Canadian dollar is trading on rate differential between Canada and US as opposed to oil prices.

Well, it's the end of the year and now we need to look at 2025. How does it look?

More uncertainty Denis. So uncertainty can bring positive surprises, but also can be challenging for markets or the economy. The reality, if we look at economic policy uncertainty in US right now, it has surged. The president-elect is not yet sitting in the White House and there's a whole bunch of policies that been rolled out there. We know that there might be a tariff war between China and the US, not just Canada and Mexico. So we're reinventing the global supply chain. It's uncertain what it means to inflation and expectations down the road. The president wants to avoid inflation expectations to rise. But this is pretty acute in terms of policy uncertainty right now. And this is a fairly high level, even if you compare to 2016 when he was first elected.

Well, we've never seen. Outside COVID, you have to go back to 2012 where it was the debt crisis in Eurozone, US was downgraded back then also, don't forget that... And there was also the beginning of a war in Syria, which is reigniting again. So we'll see what happened.

Syria is back again.

Yeah. So that can bring more challenges for markets. So again, this is not everything is so calm looking into 2025.

And we had two really spectacular year in terms of performance.

Yeah. So the message is don't be greedy when we've had two exceptional years of market returns, doesn't matter which asset classes, 2024 is just as good as 2023. It's exceptional to see back-to-back years like that. So again, looking into 2025, there are still uncertainties. So just be comfortable with your current asset mix and whether it respects your investment horizon. If not, then just give you know the calls that need to be made. But again, I can't promise you a third year of exceptional returns given the uncertainty that we see out there.

Well, on that, Stefane, thank you very much. Thank you for all of you to participate and to listen to our monthly Economic Impact. On behalf of the technical team of Economic Impact, on behalf of Stefane and myself, we wish you a happy holidays and hopefully we'll see you back in 2025.

Hello everyone, welcome to Economic Impact. Today is November 20th, 2024, and as usual I am with our chief economist Stéfane Marion. Stéfane, we had an election in United States.

Yeah, it's been a shock for many people, many sectors, but for financial markets, Denis, I have to tell you it's been positive so far. And as you look at the year so far, year to date, we're looking at positive returns for every asset class. And you know what? Despite the fact that the stock market has done particularly well this year in the US, Canada too and last year, investors now believe that next year could be yet another banner year.

Wow! Can we say the same thing for across the world? Is it the same situation? Are we seeing the same results?

No breadth is not that great Denis when you when you think about it because the reality is that—there's a lot of numbers on this slide, but bear with me—if it's green, these markets reach a new all time high in November. There's only three markets in the world that did that, the US, Canada and Hungary. So not everyone wins in this new political or geopolitical environment.

And since the election of Mr. Trump, price earning are still at the top, at the highest.

Well, the reason the US is as high as it is right now, it's been driven by multiple expansions. So forward P ratios are now trading at 23 times forward earnings. Denis, if you look prior to the COVID pandemic, when earnings normally surged during a recession, you have to go back to 1999 to see earnings or price the valuation on the stock market as high as what we have right now. And, and notice that the valuation on U.S. stock market is 35% higher than it was when Mr. Trump first won his election in 2016. So there's a lot of good growth expectations already built in the current valuations.

And at the same time, we're observing shift into yield curve, major shift in the yield curve.

This is where I'll need you to help me because you used to be a fixed income specialist and you still are, but you are actively involved in terms of trading. So what we're seeing right now, what's helping fuel the rally in financial markets is the fact that the yield curve, which had been inverted for two years. And remember, you and I exchanged a lot of times on that saying an inverted yield curve is not a good sign for the economy. Well, guess what? The inversion has disappeared. And now people are saying, wow, if the yield curve inversion has disappeared, therefore the economy can only do better in the months ahead.

Yeah. What's quite interesting that we're seeing a yield curve, you know, shifting upward while we're seeing rates going down, and we don't see that very often in the cycle.

No. So it's a yield curve. You know, it's a steepening, but it's a bear steepener.

That's getting complicated.

It's complicated, but it's most important. Because if you calibrate your model on just the shape of the yield curve, you say, OK, it's steepening, it's good for the economy is one thing. But what's happening right now, it's steepening, but I can't calibrate a model for something I've never seen. So what I'm trying to say here is that yes, rates are coming down at the short end of the curve. The feds already reduced the Fed funds rate by 75 basis points. But long-term rates, 10 year treasury yields, are up 79 basis points. So this type of bear steepener, Denis, has not been observed in over 30 years. Since the Fed started targeting the Fed funds rate, this is the first time it happens when the Fed starts cutting rates. So most unusual.

But what's kind of weird also is that the government, U.S. government are going for, you know, probably one of the biggest deficits ever and we're seeing the yield curve going down. In fact, shifting U and treasury Fed fund going down, that's weird.

There's a malaise here that seems to be explained by the fact that the 10 year treasury yield is moving higher because people are concerned now because with the level of government debt in US. So unless the US is able to significantly reduce its spending, what we're looking at for the next few years is that the US debt to GDP ratio will exceed the previous high, which was reached after... well at the end of World War 2 when the US was financing a global war. So we are in unchartered territory. Hence the movement of the yield curve that is most uncanny.

Despite all of that P/E are high, yield curve is shifting up, Fed funds are going down. People are still expecting good results or good performance for the coming year. So people are looking at the yield curve with not necessarily the same amount of details that we should speak to, you know, is it a bear or bull steepener? So you're absolutely right. What's driving the market right now? It's a steepening of the yield curve, as simple as that. And yes, every region of the world is expected to benefit from the new economic policies that will be unveiled by Washington in the quarters ahead. So anyway, Denis, when you look at this, every region of the world is expected to be up next year. So I'm not sure everyone wins in a new political or geopolitical environment, but these are the expectations as we speak.

There's a lot of positive on the market right now.

There's a lot of positive on the market right now.

There's a lot of good news already priced in the market.

But the bond market is getting a little bit more suspicious.

OK, let's come back to Canada and talk about the, you know, what's going on in our own country in terms of unemployment.

So I'm going to tell you why we have a weak currency, right? So the reality is we have a big divergence in terms of economic performance with the unemployment rate for people age 25 to 54, which is your biggest consumer base if you want, at over 5.5% in Canada, whereas the US it's at closer to 3.5%. So this massive divergence, Denis, brings that if the economy is not performing, obviously monetary policy can diverge between the two countries.

Yeah, that does mean lower Canadian rate but lower Canadian dollar.

So the way your forecast models work, when you do your currency forecasts, if you have an historical, it's a near historical spread. Well, I won't say historical, but the highest since 1997. This divergence between monetary policy between two countries is likely to be sustained for longer because of the behavior of the unemployment rate which brings about a cheaper currency. So we're at 1.41 to buy U.S. dollar. Well, we might have to pay 1.45 in the months ahead according to our model if those interest rate differentials prevail for a little bit longer, which I believe they will just because of where the economy is relative to the US. So a lot of moving parts Denis.

Well, you have a lot to say today, OK, What kind of conclusion we can come with?

Well, the conclusion is it's even difficult to know precisely with precision where you are in the cycle because the US keeps on pushing more fiscal stimulus despite the fact that the unemployment rate is low. And with the yield curve that is starting to steepen right now and in bear steepener mode, we will see what happens in the months ahead, particularly that the stock market is not cheap in the US. So if long term rates move higher because people are concerned about fiscal policy, that might be an issue. Denis, I would also say, you know, not everyone will win in the new economic regime, but the market seems to be positioned that everyone wins. So I'm a little bit more skeptical on that one. I know that people are—there's a lot of hype that AI could boost productivity and that's fine by me, I have no issues with that. But down the road, we have to be, you have to be consistent with economic theory. If I want to do more AI, more robotics, I need more electricity and electricity costs are becoming a concern at this point in time. So by at large, Denis, it's a structural change. The selection will bring about structural change. Deregulation, tax cuts will be good for corporate earnings. But there are other concerns, particularly what happens with this steepening of the yield curve. So the message here today. So let's just be prepared to live with market fluctuations in a month ahead. There will be volatility, the market will find a direction. But I'm not sure that it's a one way bet that everything goes up next year.

And once again, let's be careful.

Absolutely.

Well, thank you, Stéfane, for being with us today. Hopefully, it's gonna help you in your investment, you know, assets and everything, portfolio management. We'll see you in December. Thank you for being with us.