On Wednesday, December 18, 2024, the Canadian stock market, represented by the TSX composite index, faced another day of decline as it was impacted by the U.S. Federal Reserve's decision to cut interest rates as well as market uncertainties around future projections.
The TSX composite index closed down 562.71 points at 24,557, marking one of the worst trading days for the index this year. This decline followed the Fed's decision to lower its key rate by 25 basis points, which led to a ripple effect both across the border and within Canada. Markets on both sides saw significant losses, with the U.S. market experiencing its sharpest drop of the year.
Jerome Powell, the Chair of the Federal Reserve, stated during the announcement, "When the path is uncertain, you go a little slower." This sentiment highlights the cautious stance the markets have adopted as they grapple with the Fed's updated economic projections, which suggested fewer rate cuts than previously expected for 2025.
Andrew Buntain, vice-president and portfolio manager at Fiduciary Trust Canada, clarified the situation by stating, “The Fed has entered a new phase of monetary policy with hawkish language, and that's the pause phase.” He also warned of the impending volatility, saying, “Policy uncertainty is going to make for more volatile financial markets in 2025.”
The entire scenario has been compounded by broader economic conditions affecting Canadian markets, where the economy is not as flush as its U.S. counterpart. Buntain commented, "The consumer is not as flush with cash," indicating the challenges Canadian consumers face as interest rates climb and economic forecasts remain uncertain.
Investors exhibited caution during this period, largely due to persistent worries about potential U.S. tariffs and political unrest back home. Douglas Porter, chief economist at BMO Capital Markets, remarked, “Markets are mostly trading cautiously... for a variety of reasons like the worry about the potential U.S. tariffs.” This reflection on market sentiment revealed the underlying anxiety as Canada’s Prime Minister Justin Trudeau faced increasing political pressure following key cabinet resignations just days prior.
Commodity-linked stocks, which play a significant role within Canada’s resource-heavy stock market, were also feeling the strain. The materials index and gold miners each fell about 0.7% as precious metal prices softened prior to the Fed's policy announcement.
Among individual stocks, Nuvista Energy's shares fell by 2.7% following its announcement of temporary production curtailments due to maintenance issues. Conversely, some stocks such as Tilray, BlackBerry, and Shopify managed to post gains of over 3%, reflecting uneven market performance.
The loonie, Canada’s dollar, traded at 69.72 cents US, another indication of the prevailing economic challenges. This marginal decline signals continuing pressure on the Canadian dollar, which Buntain indicated will persist without significant favorable changes.
Looking forward, market analysts expect shifts, noting the necessity for diversification among investors. Buntain pointed out, "It was such a narrowly-led market on both sides of the border, if [markets] start to change, then wise investors will welcome the need for diversification." This insight adds to the conversation about long-term strategies as investors navigate through these turbulent times.
Despite the uncertainty, Buntain remained optimistic about the nature of market corrections occurring as the year closes out, stating it’s natural for markets to take back some gains. Meanwhile, higher interest rates continue to place pressure on homeowners and the broader Canadian economy as the Fed’s actions reel through international markets.
With all these factors converging, investors will remain watchful of future economic indicators, anticipated policy shifts, and market responses to the global economic climate.
