Author: Scott Barlow

In this Market Factors, we describe why equity investors need to follow the U.S. ten-year bond yield, explain why dividend yield is less important than many believe, and take a look at some of the most remarkable important scientific developments of 2024.

Bond yields

Above 4.5 per cent is bad

Morgan Stanley chief investment officer Michael Wilson sees the recent increase in longer-term U.S. bond yields as a potential sign of concern regarding future funding of the country’s massive deficit. A higher margin of safety in the form of higher yields is being demanded by global investors.

As the year began, Mr. Wilson saw a U.S. ten-year yield of between 4.00 and 4.50 per cent as the sweet spot for equity valuations.

It is no surprise to him then that stock market leadership narrowed to higher quality stocks (those with healthier balance sheets and more reliable earnings growth) and price volatility intensified as the yield climbed to over 4.6 per cent this month.

The strategist predicts that the strongly negative correlation between bond yields and equity prices will continue until the ten-year yield falls back below 4.5 per cent. In this high-yield environment, he favours financial, media and entertainment stocks and likes consumer services stocks over consumer goods.

It is also important to note the implications of deficit concerns driving yields higher. It is a more intractable problem than inflation and one that will worsen if political instability intensifies.

Income

Why dividend investors can underperform

Ritholtz Wealth Management CEO Josh Brown wrote a column that will be considered heresy by most of our readers. It’s called Dividends are a feature, nothing more. He compares buying a stock for its dividend with buying houses based on their garage.

Mr. Brown notes, correctly, that dividend investing in any form is almost certain to outperform the S&P 500 over longer periods of time.

The column recognizes the benefits of dividends but it spends more time on their limitations. For Mr. Brown, the yield is no more important than the management team, revenue growth, market share or the competitive moat. Dividend cuts can be disastrous for overall portfolio returns.

His piece glosses over the benefits of stable yields for retired investors who are willing to sacrifice capital gains for stability and maintaining a standard of living.

I think the piece is valuable as a reminder that dividend investors have benefitted from generally falling bond yields over the past 42 years – lower fixed income yields make equity dividends more attractive by comparison. The Canadian ten-year bond, however, hit 54 basis points during the pandemic and had no where to go but up. The multi-decade trend of falling yields is over.

Diversions

Nine remarkable achievement in science in 2024

I like to remind myself that amazing human achievements are happening all the time, as exemplified by Nine of the Most Remarkable Scientific Discoveries of 2024 in Discover Magazine. The achievements cover a wide variety of disciplines, from drug development – a new treatment for HIV/AIDS with a near-100 per cent success rate and a blood test to detect cognitive decline – to the complete neurological mapping of a housefly brain.

Consistent readers of the Market Factors newsletter will know that I am not a big fan of discovery number five “CRISPR and AI Team Up” because it combines the two most terrifying new technologies of the 21st century. Anything could happen there.

The essentials

Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.

Globe Investor highlights

John Heinzl explains why he’s not hanging up on Telus even as telecom stocks get crushed. Meanwhile, David Berman argues Aritzia has a lot to live up to given its lofty expectations.

Rob Carrick looks at some options for investors who want 12 months of peace while the Trump presidency sorts itself out

David Rosenberg says TSX investors don’t have much to worry about even if Donald Trump proceeds with 25 per cent tariffs on Canadian imports

Tim Shufelt on why most thematic ETFs fail to deliver

Economists overall are quite confident another rate cut looms this month by the Bank of Canada, suggests the latest Reuters poll

Some suggestions from veteran fund manager Tom Czitron on how to make money from bonds in 2025

Ken Fisher explains why stocks only value factors affecting future profitability about three to 30 months ahead

What’s up next

The domestic CPI reading for December will be released Tuesday and a 1.8 per cent year-over-year increase is expected. Retail sales, which I have been watching carefully for signs of household financial stress, will be reported Thursday. The month-over-month reading for November is expected to come in 0.1 per cent higher.

The economic calendar in the U.S. is lighter than normal this week. Existing home sales for December is the only release of wider interest – 4.2 million in sales is forecast.

There are a few notable quarterly earnings reports this week. Netflix Inc. (US$4.179 per share expected) reports Tuesday. Procter & Gamble ($1.865) and Johnson and Johnson ($2.004) both provide results on Wednesday. General Electric Corp ($1.038) and American Express Co. release results Thursday and Friday respectively.

See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)

In this issue I try and guess what this year in finance will be remembered for in the history books and later discuss a compelling way up, then way down forecast for equities in 2025. I’ll also look back to the biggest technology blunders of the past year and look ahead to new data releases.

Lookback

2024 in the history books

This year I’ve tried to follow Morgan Housel’s advice on media consumption – namely, to first ask whether I’m still going to care about the subject in 12 months. If not, ignore. With year end approaching I’m going to try a similar exercise with the events of 2024 by identifying the market-related developments of the past 12 months that we are most likely to care about most in one, two, or five years’ time.

It’s been a year of renewable power confusion. Economics professors were writing credible guidelines to the end of oil while the IEA and OPEC were constantly revising crude demand forecasts lower. At the same time, the S&P/TSX Renewable Energy and Clean Technology index underperformed the S&P/TSX Composite by 34 percentage points.

EV demand evaporated in some areas as Ford Motor Co. cut production of its F-150 Lightning truck and Tesla Inc., according to predictions, will sell 30,000 fewer cars in the U.S. and Europe. Copper, the metal that decarbonization requires in abundance, is down about 17 per cent from its mid-May high.

2024 was also the year of AI, to the point many readers are tired of hearing about it according to our web traffic monitoring. Nvidia Corp. is up about 163 per cent so far this year on GPU demand (the semiconductors needed most for AI-related data centers) and – for a period of time – became the largest company in the world by market cap.

I started using AI almost exclusively for search purposes. I think we’re only at the very beginning for the AI proliferation trend that can potentially make all knowledge a commodity. News that 25 per cent of new code at Google is written by AI highlight how quickly some industries are adapting the technology, and how many workers may be displaced. Investment-wise, I’m looking for the next, software stage of AI to push companies like Atlassian Corp. and UiPath Inc. to greater heights.

Demand for obesity treatment Ozempic rose so sharply this year that there is a production shortage. New, similar treatments are on the way, notably an oral application from Eli Lilly. It’s possible we’ll remember that 2024 was the year the developed world obesity epidemic peaked, at least in countries where the drugs are available.

Betting markets were more accurate than pollsters ahead of the U.S. presidential election. Prediction markets like these could begin to dominate forecasts in political and other fields if the trend continues.

Ok, now we get to the touchy one. Last week I asked the following question to a colleague: “What are the odds that in five years, 2024 will be known as the year a CEO assassination kicked off the class war?”

I’m not suggesting the odds are 50 per cent or even 30 per cent that this will be the case and more class-related violence erupts. However, the widespread cheering of suspect Luigi Mangione on Reddit and other forums is to me indicative of the same frustrated rage that animated Donald Trump voters.

I do believe the U.S. health-care system is simultaneously broken and inhumane (although given some of the news domestically I will be careful at throwing this stone from a glass house), even if it subsidizes drug development for the rest of the world. Even so, I don’t think the social contract can allow for vigilantes waxing executives on New York streets.

I don’t think former UnitedHealthcare CEO Brian Thompson’s name will go down in history with Archduke Franz Ferdinand but that won’t stop me from worrying about it for a bit.

And on that note, I’d like to thank all readers who followed along in 2024 and wish you happy holidays and a lucrative 2025 in the market.

Equities in ‘25: Up, then down

Richard Bernstein Advisors (RBA) argued that the first half of next year will be great for U.S. equity markets but the second half might be very unpleasant.

The report identified five reasons for a fast start to 2025: the Atlanta Fed’s GDPNow indicates an economy currently growing at more than 3.0 per cent which provides momentum; likely Fed rate cuts; accelerating profits; tariffs spurring domestic activity; and onshoring. (The last two are almost related enough to be the same thing but five is a rounder number I guess).

The potential for inflation has RB Advisors recommending shorter-term bonds. Higher prices for consumers and businesses that increase inflation expectations will also push long-term bond yields higher – which is historically inconsistent with a risk-on backdrop for equities. The team projects peak profits for the S&P 500 in the second quarter and decelerating earnings is likely to cause volatility thereafter.

Sentiment is an issue because investors are extremely bullish. The report emphasizes that investors are the most bullish they’ve been in the 40-year history of the Conference Board’s consumer confidence expectations for stock price Increases. Once everyone’s bullish, there’s no one left to buy stocks.

The full report is here

Diversions

Biggest tech disasters of 2024

The MIT Technology Review outlined the eight biggest technology failures of 2024 (soft paywall), a nostalgic trip down the memory lane of nerdy screw-ups. Boeing features heavily thanks to its misadventures in space and AI’s failure to adhere to social norms is also front and center. In hindsight the Crowdstrike Holdings Inc.-related outage was likely the most important story.

The essentials

Looking for our updates on market movers, analyst actions, stock technicals, insider trades and other daily, weekly and monthly insight? Click here to visit our Inside the Market page.

Globe Investor highlights

Rob Carrick reports on how investors lost millions of potential gains in the postal strike, and it’s not just Canada Post’s fault

High on hope, much of Wall Street is only hearing what it wants from Trump, reports the New York Times

David Rosenberg thinks the loonie may have finally bottomed out

Looking for inspiration on what to do with the additional $7,000 TFSA contribution limit in 2025? Here’s a profile of one investor sitting on $1.2-million in his account thanks to growth stocks

What’s up next

There’s still some important domestic data before the big day on the 25th, starting with retail sales for October on Friday. Economists forecast a topline month-over-month increase of 0.7 per cent and 0.4 per cent ex-autos for a release that could provide insight into how well Canadians are dealing with high debt loads.

GDP growth for October will be out next Monday along with industrial production for November.

Thursday will see the release of U.S. GDP growth for the third quarter – 2.8 per cent annualized is forecast. On the same day, the (mis)Leading Economic Index (MEI) is expected to show a 0.1 per cent decline for November (misleading because it keeps predicting a slowdown that never happens) and personal spending for November is expected to increase by an inflation-adjusted 0.3 per cent when it’s out on Friday.

For U.S. earnings reports there’s Accenture PLC (US$3.41 per share expected), FedEx Corp (US$3.95) and Nike Inc. (US$0.63), all on Thursday.

See our full economic and earnings calendar here (You can bookmark the page – it gets updated weekly)