Weekly market wrap

More broadly, we believe the jobs data in both the U.S. and Canada continue to point to labour markets that appear to be cooling after a period of outsized strength in the post-pandemic period. However, these job markets don’t appear to be imminently collapsing, and the U.S. unemployment rate of 4.1% still points to a healthy supply and demand balance. In Canada, employment data next week is likely to show that the unemployment rate ticked higher, from 6.5% to 6.6%, approaching the highs for the year. 

Perhaps the positives here are that a softening labour market should keep the Federal Reserve and BoC on track for continued rate cuts in the meetings ahead, and we should see an easing in wage growth over time, which would support lower services inflation as well. 

The Federal Reserve is poised to continue its rate-cutting cycle 

In addition to U.S. elections next week, the November Federal Reserve meeting is also on deck for Wednesday and Thursday. Given the weaker-than-expected jobs report and downward revisions, we believe the Fed is squarely on track to cut rates next week by 0.25%. In fact, markets are now pricing in higher probabilities of rate cuts at both the November and December Fed meetings. 

Beyond the 2024 meetings, we would expect the Fed to continue to bring rates toward a more neutral level, although perhaps at a more measured pace, given that it will be mindful of not stoking inflation along the way. In our view, the terminal rate, or ending policy rate, will likely be around 3.5%, which implies about six rate cuts total from the current 5.0% fed funds rate. 

In Canada, the BoC has already cut rates four times, bringing its policy rate to about 3.75%. We would expect the BoC to cut rates again at its December meeting, and perhaps enact up to four rate cuts total. This would bring terminal rates in Canada closer to 2.75%, below the Fed’s potential 3.5% ending rate. In our view, given that the Canadian economy has slowed more than the U.S., while inflation is closer to 2.0%, the Canadian central bank is more likely move rates lower to support household and corporate consumption. 

Historically, if central banks are cutting rates for the right reasons — i.e., inflation has moderated and they want to gradually move rates to less restrictive territory — this is a good backdrop for financial markets. In our view, there is opportunity both for equity and bond investors, especially if the economy holds up and corporate default rates remain low. 

The underpinnings of the bull market remain intact 

Despite the uncertainty around the outcome of next week’s U.S. presidential elections, economic fundamentals remain solid, which should continue to support the ongoing bull market. After a rally of about 60% in the S&P 500 since October 2022, the pace of gains in stocks may moderate, but markets will likely be paying most attention to the economic data, including corporate earnings growth on pace for 9% this year and a labour market that is cooling but not collapsing. 

History also tells us that election-related market volatility has often been a buying opportunity in portfolios. In particular, November and December in election years have tended to be positive months for U.S. markets. For long-term investors, we would continue to lean into market volatility as an opportunity, to diversify portfolios or add quality investments at potentially better prices. 

We favour U.S. large-cap and mid-cap stocks, and diversification across growth and value sectors, as earnings growth continues to expand. In fixed income, we believe investors should remain cautious of being too overweight cash-like instruments, like GICs and money-market funds, and should consider gradually extending duration in the investment-grade bond space, especially as we believe the Fed and BoC remain poised to continue their rate-cutting cycles.