July 25, 2024

KT Business

The Business Servicess On for You

Weekly stock market update | Edward Jones

2 min read

More broadly, the Fed and BoC have been closely monitoring trends in inflation and the labour market. For the Fed, both sides of its dual mandate (price stability and employment) seem likely to soften, and it may be inclined to start its rate-cutting cycle ahead of any potentially more damaging downside to the economy. According to CME FedWatch, the probability of a September rate cut has risen to about 72%, well above the 58% probability just last week, implying the Fed may undertake up to two rate cuts this year. 

The BoC meanwhile has already begun its rate-cutting cycle, implementing its first rate cut at its June meeting, bringing policy rates from 5.0% to 4.75%. In our view, given the softening trends in the Canadian economy and labour market, alongside potential cooling inflationary pressures, we see the BoC continuing to cut rates, perhaps two or three times more this year.

What does this mean for markets and portfolio positioning?

History tells us markets can continue to do well in an environment of cooling but positive economic growth, moderating inflation and a central bank that may be poised to cut interest rates. This is in part because, over time, lower rates and lower inflation can lead to increased economic activity and positive revisions to earnings growth as well.

From an equity perspective, with economic growth potentially softening, we may continue to see the U.S. mega-cap technology and growth parts of the market — especially those that can deliver on earnings — continue to perform well. The more cyclical parts of the market — those sectors leveraged to economic growth — may not participate as meaningfully, until perhaps the Fed and BoC can lower rates to spark a potential reacceleration in consumption. 

We continue to favour large-cap and mid-cap U.S. equities over the medium term, which we believe have scope to continue their bull market phase, albeit not in a straight line higher. As always, corrections are likely and perhaps healthy in any market cycle.

In the fixed-income market, we favour longer-duration bonds within the investment grade space, which may perform well as economic growth cools and yields soften, and as the central banks embark on rate cuts. More broadly, while longer-dated government bond yields may move lower, the scope for substantial downside from here may be limited, particularly given elevated deficit levels and the Fed pointing to 2.5% to 3% as its end goal for the fed funds rate this cycle.

In this backdrop, we continue to see bonds providing a meaningful source of income for long-term investors. We also see balanced portfolios remaining a core investment for households with the appropriate risk preferences and income needs.

Mona Mahajan
Investment Strategist

Source: 1. FactSet

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