Equities drop by 2% in one day for the first time in almost a year

• The Bank of Canada cut its overnight rate by 25 basis points and plans further cuts in 2024 and 2025 to support the slowing economy, despite uncertain immediate relief for consumers.
• U.S. stocks dropped more than 2% in a single day for the first time in 356 days, as big tech earnings disappointed.

As expected, the Bank of Canada (BoC) cut its overnight rate for the second time by 25 basis points (a quarter of a percentage point). More rate cuts are needed to support the slowing Canadian economy. The BoC has shifted its focus from inflation (now under control) to economic support. Unemployment has been rising for two years, and a wave of mortgage renewals is approaching, adding stress to consumers. We anticipate two more rate cuts in 2024, with further reductions in 2025. However, the speed at which these cuts will bring relief to consumers remains uncertain.

The BoC’s statement, while maintaining a commitment to price stability, was conciliatory, indicating more rate cuts. It acknowledged the slowing Canadian and U.S. economies but expects a recovery in household spending later this year. However, the real impact of the cuts may not be felt until late 2025; gross domestic product projected growth for 2024 is only 1.2%.

There is a clear path toward lower interest rates, which should gradually bring some relief to Canadians. However, the immediate effects might be limited. We expect the BoC to make two more 25-basis-point cuts by the end of 2024, which could mirror the U.S. Federal Reserve’s (the Fed) anticipated cuts later in the year (it’s expected to cut its funds rate by 25 basis points in September and December). However, the BoC’s decision to cut rates ahead of the Fed could lead to the Canadian dollar losing value against the U.S. dollar; its target range value is US$0.72–0.70 for the next six to 12 months. We advocate for balanced portfolios, offsetting equity volatility with fixed income assets. Adopting a balanced approach, with the advantages of having fixed income in portfolios is crucial: never neglect your defensive options.

Stocks took a hit on Wednesday, with the S&P 500 dropping 2.3% and the NASDAQ sliding 3.7%. It was the first time in 356 days that the stock market dropped more than 2% in a day. The decline was especially sharp among large cap stocks, particularly in the technology, consumer discretionary and communication services sectors, which fell by around 4%. Disappointing earnings reports from Alphabet and Tesla weighed heavily on sentiment, setting a gloomy tone ahead of upcoming reports from other major tech companies. 

In contrast, traditional safe-haven stocks outperformed, with utilities and health care sectors posting gains. However, the mood was further soured by a surprise contraction in the U.S. Manufacturing Purchasing Managers’ Index (a measure of economic trends in manufacturing), which came in below all analyst forecasts, although the Services Purchasing Managers’ Index exceeded expectations. Meanwhile, eurozone Purchasing Managers’ Indices continued to show weakness.

Listen to this week’s podcast for further insights.