Every year, financial markets deliver a few big surprises, when something zigs after you fully expected a zag. This year, it seemed like much of the market defied expectations.
Toronto-Dominion Bank TD-T diverged from the rest of the Big Six after U.S. authorities imposed a hefty fine on the lender and restricted its expansion into the U.S. market. The financial hit to the combined value of TD’s outstanding shares since the ruling: $19-billion.
Loblaw Cos. Ltd. L-T continued its ascent, even though the company became a popular target for consumer wrath over rising food prices. The stock rose 49 per cent this year, leading competitors Metro Inc. MRU-T and Empire Co. Ltd. EMP-A-T
And BlackBerry Ltd. BB-T has surged more than 70 per cent over the past month, after posting better-than-expected quarterly financial results in its cybersecurity and connected-car software units.
But if I had to narrow the shockers down to three highlights, these would be my picks for 2024.
Interest rates go down, bond yields go up. Wait, what?
There was a strong case in favour of bonds near the start of the year, as U.S. and Canadian inflation rates subsided and investors got ready for rate cuts by central banks. Lower rates should have returned some shine to bond prices that had been suffering during the previous two years of rate hikes.
Initially, investors got what they wanted as the yield on the 10-year U.S. Treasury bond declined to a low of 3.6 per cent in September from a high of about 5 per cent in 2023. As yields decline, bond prices rise.
But the recovery in the bond market has since stalled. The U.S. 10-year bond yield flirted with 4.6 per cent last week, after the Federal Reserve suggested that the pace of rate cuts would slow considerably amid economic strength.
Similarly, in Canada, where the central bank has slashed its key interest rate by a total of 1.75 percentage points since June, the yield on the Government of Canada 10-year bond has risen slightly in 2024.
Even if the bond market doesn’t get your heart rate going, the backup in bond yields has influenced other corners of the investing landscape, such as dividend-paying stocks. Some of these stocks, which include real estate investment trusts and utilities, have been stumbling over the past few months.
My hopeful prediction: U.S. economic activity will subside and concerns about tariffs will blow over, giving way to slower growth and lower inflation. Bond yields are going down.
The telecom tantrum (not just BCE)
Telecom stocks may have looked like solid picks near the start of the year. If nothing else, lower interest rates should have made those big telecom dividends stand out in a good way.
The sector didn’t play along, though. BCE Inc. BCE-T, Rogers Communications Inc. RCI-B-T and Telus Corp. T-T declined by an average of 28 per cent in 2024, through Dec. 23. They were the worst, second-worst and sixth-worst performing stocks, respectively, in the blue-chip S&P/TSX 60 Index.
Big incumbents battled each other for wireless customers in an increasingly fraught competitive environment. And Canada’s lower immigration targets are seen as an additional headwind for the telecom sector.
Here’s the really surprising part: As share prices faltered, dividend yields soared. Telus’s yield rose above 8 per cent in December and BCE’s neared 12 per cent, reflecting a grim outlook for profit growth.
In BCE’s case, there are rising concerns among some analysts that the company may have to slash its quarterly payout to get its distributions in line with its profits. Full disclosure: I have been riding BCE and Telus down, down, down.
My stubborn (and self-interested) prediction: The sector-wide nature of this downturn lowers the risk of any one telecom stock blowing up. They can’t all lose, can they?
AI: The big hope, the big worry
The artificial-intelligence theme has been sizzling for much of the past two years, as investors bet that the advanced technology will enhance productivity in a big way. But investor infatuation in 2024 drove more stocks to new heights, raising concerns that a bubble could be forming.
Move over, Nvidia Corp. NVDA-Q, Broadcom Inc. AVGO-Q joined the exclusive trillion-dollar market capitalization club this year after the share price surged nearly 50 per cent over the past month alone on AI-fuelled hopes. Its price-to-earnings ratio, based on trailing 12-month profits, is 196.
Palantir Technologies Inc., which uses AI in its commercial software platforms, is up more than 400 per cent this year. Its P/E ratio is 414. By comparison, Nvidia looks like a bargain, with a P/E ratio of 55.
My contrarian, missed-out-on-the-action prediction: This won’t end well. When? No idea.