2024 Market Review

Sébastien: Welcome to the “In Your Interest!” podcast. My name is Sébastien Mc Mahon, and today I’m joined once again by my colleague and stock picker superstar Marc Gagnon. Hello, Marc!

Marc: Hello, Sébastien!

Sébastien: It’s a pleasure to have you again this week. Last week, we did a review of the economy in 2024. Now, being market people, of course, we wanted to have an episode on reviewing how the markets behaved in 2024. So, was it an interesting year for you? 2024?

Marc: Yeah, yeah it was of course. You know what, Sébastien? I’ve been doing that for more than 23 years and every year is interesting, I can assure you!

Sébastien: There is always something.

Marc: Oh, yeah!

Sébastien: So maybe let’s start with looking back at the expectations we had last year when we were doing our outlook for 2024. And I’m looking at my sheet here. I’m looking at yours. There is a bunch of green, one red, but a bunch of green. And on mine, there’s a bunch of red and one yellow. So clearly, you know your stuff better than I do. So maybe I’ll just move my stuff out of the way to get to yours. So, I was expecting on my end that bonds would outperform stocks. Of course, the US economy outperformed our expectations. So, there you go: bonds underperformed. About 5%, I would say, for bond indices. Stocks, what? Five, six, seven? Between 25 and 35%!

Marc: Yeah, Canadian stocks: 25. US stocks: 37, 38.

Sébastien: So, if I’m to be wrong, it might as well be dead wrong!

Marc: [Laughs]

Sébastien: I was expecting the S&P 500 to underperform, but nope, we are at about 35%. And of course, the flip side, I was expecting the TSX to outperform. This is kind of true-ish, because in the second half of the year the TSX has outperformed. But you know, let’s be honest, the TSX underperformed the S&P 500. So, I don’t have a good batting average here. But how about you? You had a better year.

Marc: Yeah, I got a couple right, but I guess the last one is quite interesting. But let me start with what I thought would be good. I was positive on the stock market, both the TSX and also the S&P. So that turned out to be a good year, like we said: 26% for the Canadian stock market and 37.6% for the S&P. We’re even not talking about the Nasdaq here, just the S&P. So, that was pretty good. Magnificent seven: they continued to do well, especially Nvidia, up 182%. Some others were good: Tesla toward the end of the year, Amazon, Meta. Microsoft, though, only 19% and Apple only 28%. While I say “only”, we understand that’s below the market, the overall market performance. But where I tripped a little bit, I said: “Well, you know what? It’s going to be a better year for stocks than bonds, but not as good as 2023.” 2023 was 8.3%, 8.1% for the TSX. And this year, it was 25.7%. So yeah, as you said, if we have to go wrong, let’s go big.

Sébastien: Yeah. Go big or go home. Okay. Alright. So that was for our outlook last year. So now that we know what we know now, what were the largest surprises for you this year in the markets.

Marc: Well, it’s a bit of a technical point, but for people that have their hands really in the market, it was interesting to look at this year and see that the dispersion between the different sectors was smaller than usual. We have only one sector that is negative: it’s telecom—minus 16%. All the other ones were positive. That’s really interesting, first of all. Technology did really well: 45% because of Shopify mainly, as usual. 66% return. But all the other ones were pretty close to the overall market. The dispersion was between 12% positive and 29% for most of the important sectors. So, when you’re a stock portfolio manager like me, then if you cannot rely on sector allocation, the other way to make money is stock selection. Make sure that in each and every sector you take the good guy, the one that outperforms. And sometimes, you know, you have to go down into the details. It’s not easy. So, for me, like an everyday… I wouldn’t say surprise but an important thing I had to deal with, that was certainly one.

Sébastien: So if, in other words, 2024 was a stock market rather than a market of stocks.

Marc: Yeah, exactly.  

Sébastien: Okay. But still, in the end, you know, let’s still take the time to celebrate at the end of this year. When you get 25, 30, 35% on an asset class like stocks in a year, you know, let’s celebrate!

Marc: You should have a couple of bottles to pop here because it was quite a year!

Sébastien: Yeah. On my end, you know, the surprises: the performance of stocks, again. I was expecting a year that would be a bit tougher based on all of the rate hikes that we’ve had before. So pleasantly surprised there. The S&P 500: you know, we were looking at the expectations for earnings at every earnings season. Always thought: “Well this is elevated. How can the market meet it every time, you know, those expectations.” And you know, the market did! And the TSX was pretty strong in the second half of this year. Some catching up. That was a positive surprise. And as we mentioned in the previous episode, the utility sector, with all of the data centre theme, bringing electricity to data centres, producing electricity, you know, that was a very surprising but positively surprising theme, because usually it’s kind of a boring sector. But now it’s starting to be a derivative of the AI theme. So, good surprise there. Bonds: you know, the US economy surpassed our expectations. That means that bonds underperformed. The Canadian dollar: the weakness that we’ve seen, we think that there’s a lot of perception of the weakness of the Canadian economy, but we think that maybe now it’s mostly in the price. So, I would double down and I will do that when we do our 2025 outlook episodes in a few weeks that I still think that the Canadian dollar should be stronger than it is now. So that’s going to be one of my calls. Maybe a contrarian call, but still a call for 2025. And gold: you know, we were lucky. We put a position in in November 2023 expecting a good year, but we had a year where at some point we were up 30% on gold. So, you know, even if we were optimistic, we were surprised by how strong that was. A year that was anything but boring!

Marc: Yeah, I know. At the heart of these surprises, the strong economy in the US, I think, is responsible for, not all of it, but a good chunk of those surprises.

Sébastien: Yeah. And you had stuff like geopolitical risks that were positive for gold. There was a bunch of stories that were positive for one or the other asset class, and it seemed that the market was fading all of the geopolitical risks. The geopolitical risk premium kind of disappeared from the market.

Marc: Yeah. It would be interesting one of these days to do a podcast on that because, you know, most of the time we get scared by the geopolitical risks, but very rarely, it really turns out to be affecting the market and the supply and demand. There are many ways to adjust. Or sometimes it’s just, you know, just fear at the end of the day.

Sébastien: Yeah. And we had a good example, I think, when Russia invaded Ukraine, where everyone was saying: “Oh my God, all of those sanctions! And they produce a lot of food and oil!”. And you find out that, you know, the economy always finds a way.

Marc: Yeah, exactly.

Sébastien:. Commerce goes through other countries. And in the end, you know, after a few weeks or a few months, everything is back to “normal.” And the market just fades those. So yeah, I would agree: if you’d be interested in such an episode, we could always do that together. And I know a few other people who would love to join on that. It could be a good episode! Talking about geopolitics and risks, of course, you need to talk about Donald Trump and the election. So of course, we didn’t start looking at this on November 5. We spent a lot of time discussing that throughout the year. You know, an acceleration somewhere early summer. On our end, the asset allocation team, we saw a potential Trump election as being pro risk. So, we maintained an aggressive risk profile that paid. We did put some hedging trades on, but it was not hedging a Trump win. It was hedging more gains than expected on the Democrat side because, you know, the market was clearly pricing in a Trump win by about 70, 80%. And we didn’t need those hedges. So, eventually, you know, I think in the end the Trump election was positive for performance. So how did you navigate those waters?

Marc: Yeah. As you said, you know, just looking at surveys, we knew that it would be like risk-on, pro investors. Trump with his reputation with the economy, the deregulation that would, you know, surely come after. That’s something that he believes strongly about. He talks a lot about. So, we knew that that would be a risk-on, mostly. So, on the other hand, the Democrats were mostly status quo, you know. Same as before. But then we said: “Okay, let’s make sure that we keep a risk-on profile in the portfolio, but maybe let’s fade, let’s sell a bit of those potential victims of tariffs, you know: stocks that are related to Mexico, stocks that are related somehow to China. No direct relationship, but just, for example, commodities. Copper, for example. China was already having some problems with their real estate, so if we add tariffs to it, it’s not going to be very good for copper, at least on a perception basis. So, we got out of some of our positions there, and it turned out to be, I think, overall a good thing.

Sébastien: Yeah, I agree. And, of course, Trump was the big story in 2024. But outside of Trump, the main investment themes that were, you know, underlying your decisions in 2024, can you name a few?

Marc: Yeah. You know, I’ve talked a bit about the weaker dispersion between the different sectors, but there was a bit of a story of rotation, also, that I can allude to. The first part of the year, the resources were very strong with copper. We also had oil performing, at one point, very well. And then, you know, with the rise of Trump as potentially the president and so on, we saw a bit of a slowdown on that front. And after that, the Bank of Canada was fortunate enough to be able to cut rates. The fight on inflation was clearly on a good path. And then the financials, especially the banks, anticipating, because usually the banks are doing well when short terms are low and long terms are high. So, even though the long terms were not really moving higher, the short terms were moving lower. And it was good for financials. And that’s really the wave that allowed us to outperform the US in the second part. You talked about that: that in the second part of 2024 the TSX was better. So that was clearly something that helped. Gold was also a positive. Not to the same extent as how you played it so well in the different asset allocation themes and strategies. But yeah, overall, also, it was a positive move.

Sébastien: Yeah. Calling gold in 2024 was lucrative. Also, the anticipation toward how central banks would behave, I mean, we’ve discussed that. But, you know, it was important to have a view on this. AI, productivity gains, that means staying risk-on throughout the year. And also I think this carries into 2025 as well. When we do the outlook I’m sure we’ll be talking about the importance of, you know, not getting too pessimistic as we head into 2025, even if we had returns of 25, 30, 35% on stocks, that doesn’t mean that the next year returns will be negative or zero. So, I think this is one of those, but we’ll discuss that in the next episode. Japanese stocks, you know, they were top of mind on our end. Lots of structural reforms over there, unlocking value. Of course, this was not the star of the show in 2024, but still, it’s a position that we hold. Copper prices with the story in China. You know, there’s been lots of volatility there, some good opportunities. And also, you know, we’ve mentioned China. Well, Chinese stocks have had a wild ride this year. There’s been a few false starts. But as we end the year here, there’s lots of optimism that China will be coming in with reforms pushing stock prices higher over there. So also an interesting theme that might carry into 2025.

Marc: By the way, if it happens, it’s going to be quite positive for the Canadian market because it means that commodities should also do well. And Canada, as we know, is always well exposed to commodities.

Sébastien: Yeah, I agree. So, before we end here, any closing remarks on an exceptional year?

Marc: Well, you know, we would take these kinds of years every time, every year if it’s possible. But I think what you said is very important. It doesn’t mean that because we had such a good year, we have to leave everything and to run for shelter. I think that the interest cut is a powerful tide that will continue to lift the different boats. And it’s not rare that a very, very good year is followed by maybe not such a good year, but another interesting one in terms of returns.

Sébastien: Okay, good. Well, thank you very much, Marc. Looking forward to having another conversation with you and some of our friends on the fixed income side on the 2025 outlook, which will be out in a few weeks.

Marc: That will be very interesting.

Sébastien: So, thank you very much and thank you to all of our listeners. If you appreciate the content here, you know, please share, ask us any questions that you want. And, of course, come back again next week.