Between January 1 and October 31, 2023, the TSX lost 3.3% of its value. But from November 1, 2023 to January 31, 2024, the TSX has rallied an impressive 12.2%. And the long-term outlook for the TSX remains bullish. But investors may be getting ahead of themselves.
Why Is the TSX Doing So Well?
On November 1, the Federal Reserve announced it was leaving its key interest rate unchanged. It also hinted that future rate hikes were over. Optimistic investors also took this to mean rate cuts were coming in 2024.
Then, at its mid-December meeting, the Fed held its key lending rate again at a range of between 5.25% and 5.5%. It also signaled that three rate hikes were on the table in 2024. When exactly the first interest rate cut is coming is a guess right now, most investors want it to happen in March. On January 31, however, the Fed hinted that the first rate cut is likely months away, probably in June.
Why do the actions of the Federal Reserve and other central banks like the Bank of Canada matter? History shows that Federal Reserve policy has an overarching correlation in determining the direction of the stock market. It’s why famed American investor and market forecaster Marty Zweig coined the term “Don’t fight the Fed.”
Higher interest rates make it more expensive to borrow, which also makes it more expensive to service debt, which in turn cuts into profits. Lower interest rates make it cheaper to borrow and suggest the economy is doing well. And right now, with interest rates still at decade highs, investors want to see them come down.
Should the Federal Reserve or Bank of Canada hint at their next meetings that rate cuts are still months away or even suggest that rate hikes are back on the table, you can expect the markets to turn bearish.
Higher for longer rates will continue to weigh on the Canadian economy, which contracted in the third quarter and is forecast to slip 0.3% in the fourth quarter. Two consecutive quarters of negative growth is the definition of a recession.
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A dovish Federal Reserve has been helping the broader TSX trend higher and coming interest rate cuts could see the TSX hit a new record high in 2024. Again, the TSX is up 12.2% since the start of November and is just 5.4% from its all-time high of 22,213.07 in April 2022.
Despite that optimism, the Canadian economy remains fragile, inflation is still a concern, as are fears of a mild recession. What should investors do in this climate? Ask the trading experts at Learn-To-Trade.com.
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