The Drivers of Economic Growth: Easing Monetary Policies and Their Impact
Elevated inflation has been a significant concern for economies worldwide, but recent trends indicate a downward trajectory. This shift has allowed multiple major central banks to begin easing their monetary policies, creating a more favorable environment for economic growth, labor markets, and corporate profits. As central banks adjust their strategies, the implications for various sectors of the economy become increasingly apparent.
Recent data on gross domestic product (GDP) and inflation has further illustrated these trends. In the United States, updated estimates for third-quarter growth revealed that the economy has remained robust, expanding by 2.8%, consistent with previous forecasts. This growth is particularly noteworthy given that the domestic economy recorded a modest 1% increase during the same period. A key driver of this resilience has been household spending, which surged by 3.5%—the strongest growth in over a year. This uptick in consumer expenditure signals that solid economic fundamentals could continue to bolster domestic activity.
Inflation indicators also reflect a stabilizing economy. The core personal consumption expenditure (PCE) price index, a favored measure of inflation by the Federal Reserve that excludes the more volatile food and energy prices, rose by 2.8% year-over-year in October. While this figure is slightly higher than September’s 2.7% increase, it aligns with expectations and suggests that the broader inflation trend remains intact, albeit with some fluctuations. This stability in inflation rates provides reassurance to policymakers and investors alike, indicating that the economy is navigating through a complex landscape without veering off course.
The relative economic resilience in the U.S., coupled with growth prospects stemming from technological innovations, has allowed U.S. equity markets to maintain their lead. Over the past 12 months, both U.S. and Canadian stocks have soared more than 35%. Canadian equities have benefited from strong performances in the financial and materials sectors, which are significant components of the Canadian market. Although international equities have lagged due to global trade-policy uncertainties and softer economic prospects, they have still managed to deliver solid double-digit returns during the same period.
In the fixed income space, bonds have begun to recover from the challenging environment of rising interest rates that previously weighed on their returns. While the three-year horizon remains negative for bond returns, investment-grade bonds have outperformed cash-like investments over the last year, despite a recent uptick in yields following the elections. Lower-quality bonds have particularly excelled within the fixed income category, driven by higher interest rates and contained credit spreads. This performance underscores the importance of diversification in investment strategies.
For investors, the current market dynamics present both opportunities and challenges. As positive returns accumulate, it is crucial to consider how market performance may have influenced portfolio allocations, especially when layering this year’s gains on top of the previous two years. With stocks significantly outperforming bonds in recent years, many portfolios may have drifted from their target allocations. This drift increases the risk that portfolios will not perform as expected, particularly for those heavily weighted in U.S. or Canadian stocks.
The importance of a disciplined rebalancing strategy cannot be overstated. Failing to rebalance can lead to substantial shifts in a portfolio’s allocation over time, potentially exposing investors to unintended risks. If your portfolio appears misaligned, it may be prudent to evaluate whether rebalancing could better position you for the upcoming year and beyond.
In summary, the interplay between easing monetary policies, inflation trends, and economic growth creates a complex yet promising landscape for investors. By staying informed and proactive in managing portfolio allocations, investors can navigate these changes effectively and position themselves for future success.
