It’s happening….the Bank of Canada cuts interest rates
Global markets continued to perform well in the second quarter of 2024, building on their strong start to the year. This positive trend was influenced by several factors, including healthy corporate profits, lower inflation, and the beginning of interest rate cuts by various central banks around the world.
The S&P 500, S&P/TSX Composite, and the MSCI World Index were up 15.3% (USD), 6.1%, and 12.0% (USD) respectively in the first six months of the year. Despite a rate cut by the Bank of Canada in June, Canadian and U.S. bonds (measured by the FTSE Canada Universe Bond Index and Bloomberg US Aggregate Bond Index) were down 0.4% and 0.7% (USD) respectively over the first half of the year.[1]
The big news for most Canadians in the past quarter was the Bank of Canada (BoC) cutting interest rates by 0.25% to 4.75%, marking the first rate cut since the central bank stopped raising rates last July. The key driving this decision is the significant progress made on the inflation front, regardless of the measure used. Specifically, four consecutive months of declining inflationary pressures were enough for the BoC to gain confidence that inflation is firmly trending down to target. The market anticipates at least two more rate cuts this year due to the continued decrease in inflation and weaker-than-expected economic growth.
TFSAs and compounding
On a different note, let’s discuss the importance of compounding when it relates to investments. The tax-free savings account (TFSA) is a savings program that was introduced in 2009 that can also function as an investment vehicle that enables Canadians to invest (tax free). Initially, the annual contribution limit was set at $5,000, but it has since increased to $7,000. As of 2024, you can contribute a total of $95,000.
The main benefit for a TFSA is tax-free compounding. For those investors who maxed out their annual contributions (a total of $88,000 over 15 years) and had invested solely in either the S&P 500 Index, the S&P/TSX Composite Index and the MSCI World Index since 2009, they saw their account values grow to $217,812, $129,026, and $166,358 respectively as of 2023.[2]
These returns were earned despite the amount of uncertainty we experienced in the aftermath of the global financial crisis, during which we’ve lived through three U.S. elections, the European debt crisis, the COVID-19 pandemic, and global trade disputes, not to mention the ongoing conflict in Ukraine and the Middle East.
Author Darren Hardy, who wrote The Compound Effect, described it as the principle of reaping huge rewards from a series of small, smart choices.
There may be an important lesson to be learned here: investors tend to associate investing with large sums of money, but that's not necessarily true. On the contrary, a series of small, smart investment choices can potentially lead to healthy returns through the compound effect.
In our view, the TFSA can be a useful investment vehicle that can help Canadians achieve their hopes, and wishes. As always, if you have any questions about the markets or your investments, I'm here to talk.
[1] Bloomberg, as of June 30, 2024 [2] Capital Markets and Strategy, Manulife Investment Management