Market Recap and Outlook – Week of July 28, 2024

Michael McCullough is a contributing editor to MoneySense and a financial writer and editor in Duncan, B.C.

Biden’s withdrawal soothes bond market, deflates “Trump trade”

U.S. President Joe Biden’s announcement that he will not seek a second term surprised the political world, yet markets reacted with a degree of calm. On the surface, equities and fixed-income markets digested the news without the abrupt swings many had feared, though sector-level shifts were apparent.

The most immediate effect was a pullback in the so-called “Trump trade.” Stocks, bonds and cryptocurrencies that had rallied on expectations of a Republican victory—especially those seen as beneficiaries of looser fiscal policy or lighter regulation—eased after the announcement. Broad equity indices recovered the following day, driven largely by gains in mega-cap technology stocks. At the same time, shares of energy companies and many cryptocurrencies retreated from recent highs as the certainty of a Republican administration diminished.

Market participants had been pricing in a higher-deficit outlook under a potential Trump-led administration, which would typically put upward pressure on inflation expectations and steepen the yield curve. With that scenario now less certain, yields have flattened modestly. Still, strategists caution that further volatility is likely as the Democratic Party’s eventual nominee and platform remain uncertain and could continue to shape investor expectations through the summer.

Investors should continue to monitor Federal Reserve guidance closely. Central bank moves on interest rates remain a primary driver for bond yields and equity valuations, and any shift in the Fed’s stance would quickly ripple through global markets.

Canadians and cross-border investors should also take note of policy differences between likely contenders. For example, Vice-President Kamala Harris previously opposed the U.S.-Canada-Mexico trade agreement while serving as a senator, citing concerns over environmental protections. Trade policy and regulatory preferences of any eventual nominees will be relevant for exporters and multinational businesses operating across North America.

Bank of Canada cuts rates again

Back at home, the Bank of Canada lowered its overnight rate by 25 basis points to 4.5%, marking a second consecutive cut. Governor Tiff Macklem signaled the possibility of additional reductions later in the year if inflation continues to move toward the Bank’s 2% target. Canada’s Consumer Price Index was running at 2.7% year-over-year in June, a substantial decline from the double-digit pressures seen earlier in the decade.

The rate cut was largely priced in by markets and aims to balance the risk of a sluggish economy against lingering inflation. Bank of Canada forecasts point to modest GDP growth over the coming years; while these projections suggest a gradual economic recovery, population growth and labour-market dynamics will influence how much the easing supports households and businesses. For mortgage holders, even a small reduction in the policy rate provides measurable relief, and bond markets often view such cuts as supportive for fixed-income returns.

“Today’s decision to cut was consistent with our call, and that of broader market consensus which had upped the odds of reduction following a cascade of recent data which showed decelerating inflation, slack in the labour market and underperforming economy.”

_{– Brian Yu, AVP and chief economist for Central1 Credit Union.}

Magnificent 7 members going separate ways

The group of seven top U.S. technology names—often dubbed the “Magnificent 7”—has shown divergent performance this year, with some companies extending leadership while others face headwinds. The split performance highlights the importance of stock selection and the risks of concentration in a small group of large-cap growth names.

Tesla’s recent quarterly report left investors searching for clarity. The automaker posted revenue slightly above expectations, yet earnings missed analysts’ estimates and the shares declined in after-hours trading. Notably, automotive sales declined compared with the prior-year quarter, suggesting that Tesla faces intensifying competition within the electric vehicle market even as it remains a major player. The company is attempting to shape sentiment with product announcements and events later in the year.

Alphabet reported modestly stronger results, narrowly beating forecasts on both revenue and earnings. The company’s cloud division delivered the most notable upside, while search advertising held steady and YouTube ad sales underperformed expectations. Alphabet also continued significant investment in artificial intelligence, allocating sizable resources to its research and product teams.

Loblaw mea culpa costs investors in the short term

Loblaw Companies and its parent, George Weston Ltd., disclosed a significant settlement to resolve a class-action lawsuit over historic bread price fixing. The settlement supports consumer restitution and regulatory accountability, but it also had immediate financial consequences for shareholders.

The grocer recorded a sizable charge related to the settlement in the quarter, which reduced net earnings and contributed to an earnings miss versus last year’s results. Revenue showed modest year-over-year growth, but it lagged broader inflation measures and reflected a deliberate pullback from low-margin non-food categories such as clothing and electronics. For dividend-oriented and income-focused investors, the news underscores how litigation and regulatory risks can compress short-term profitability even for established retail chains.

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