The Week in Review

Weekly Market Recap: U.S. and Canada

Now that’s what we wanted to see! It was a great 5-day stretch in the markets this week, with all major indices posting solid gains. The Dow Jones led the charge, followed by the S&P 500 and Nasdaq 100, as investors reacted positively to economic data and strong corporate earnings. Strong retail sales also provided a boost, although some volatility did creep in mid-week. The TSX lagged slightly but still finished in positive territory.

Looking at the numbers, the Dow Jones was up a very impressive 3.69%, far and away the top performer of the week. The S&P 500 gained 2.91%, while the Nasdaq 100 wasn’t far behind with a 2.85% increase. The TSX saw more modest growth, rising 1.16%. Overall, it was an encouraging week across the board.

S&P 500 Returns | Week At-a-Glance

TSX Returns | Week At-a-Glance

Major Economic Stories

U.S. inflation was the dominant theme this week, with the CPI rising for the third straight month. This will keep markets on edge guessing what the Federal Reserve’s next move will be. Meanwhile, retail sales showed continued consumer strength, albeit at a slower pace.

Here’s how things played out:

U.S. Inflation Rises for Third Straight Month

The annual U.S. inflation rate increased to 2.9% in December, in line with expectations.

A weaker decline in energy costs and rising food and transportation prices contributed to the uptick. Shelter inflation slowed slightly, but the overall trend shows persistent price pressures.

• Inflation reached 2.9% in December, up from 2.7% in November.

• Energy costs fell 0.5%, compared to a 3.2% drop in November.

• Food inflation ticked up to 2.5% from 2.4% the prior month.

• The monthly CPI rose 0.4%, the largest increase since March.

Core US Inflation Slows Slightly

Core CPI, which excludes food and energy, eased to 3.2%, slightly below forecasts.

On a positive note, shelter costs, which make up a major portion of the index, rose at their slowest annual pace since January 2022, but categories like vehicle insurance and medical care continued to climb.

• Core CPI increased 3.2% year-over-year, down from 3.3% in November.

• Shelter inflation slowed to 4.6%, the lowest in nearly two years.

• Motor vehicle insurance saw a sharp 11.3% annual increase.

• Monthly core CPI rose 0.2%, below the expected 0.3% gain.

U.S. Retail Sales Growth Up, But Slowing

Retail sales rose 0.4% in December, below the expected 0.6% gain, down from 0.8% in November.

Spending remained strong, though, with consumers boosting purchases in categories like sporting goods, furniture, and gasoline. Key sectors like restaurants and building materials saw declines.

• Retail sales increased 0.4%, the smallest gain in four months.

• Gasoline sales climbed 1.5%, contributing to overall spending.

• Building materials and restaurants saw declines of 2.0% and 0.3%, respectively.

• Core retail sales (excluding major volatile categories) rose 0.7%, the highest in three months.

Key Takeaways From this Week’s Economic News

Inflation’s Uptrend: A Bump or a Warning Sign?

The December inflation report showed a third straight monthly increase, with headline CPI hitting 2.9%. This came as no surprise to most, but it does still raise questions about how it will affect the upcoming Federal Reserve rate decisions. As it almost always does, energy played a big role with gasoline prices rebounding, and food inflation also ticked higher. Shelter costs, while easing slightly, remain sticky, keeping core inflation elevated.

For markets, this adds uncertainty. While 2.9% isn’t an alarming number, the steady increase complicates the Fed’s decision-making process. Markets have been pricing in further rate cuts in 2025, (the Fed has signalled two) but if inflation remains stubborn, the Fed may slow the pace of easing or even pause temporarily. That could create turbulence for stocks and bonds, and it will possibly cause investors to recalibrate their expectations.

Retail Sales: Consumers Still Holding Strong, But for How Long?

December retail sales grew 0.4%, slowing from the prior month’s pace but still showing resilience. The consumer is the backbone of the economy, and even with borrowing costs higher than we’d like, we’re still seeing solid spending. Categories like sporting goods, furniture, and gasoline saw strong demand, but spending at restaurants and home improvement stores weakened. I know I’ve said this before, but this could be a bad sign.

So, what’s next? Well, if the job market stays strong, consumer spending should hold up, but I see cracks forming. Credit card balances are at record highs, and savings buffers are thinning. If inflation keeps pushing costs higher, especially in necessities like food and energy, consumers may start pulling back, which would have ripple effects across the economy. This will be a key trend to watch in early 2025.

Core Inflation: The Real Story Lies in Housing

While core CPI eased slightly to 3.2%, one number stands out—4.6% shelter inflation. This category accounts for more than two-thirds of the total core CPI increase, which means that if housing costs don’t cool significantly, inflation will remain above the Fed’s comfort zone.

We can’t forget that housing is a slow-moving part of the inflation picture; it moves like a freighter, not a speedboat. Even though we’ve seen some moderation, rent growth is still keeping pressure on overall price levels. If the Fed is serious about cutting rates this year, it needs to see housing inflation slow further. Otherwise, rate cuts could be pushed out further than expected.

THIS WEEK’S POLL QUESTION
(Results in Next Week’s Newsletter)

My first story below is on a new report put out by Picton Mahoney, which lays outs its argument for why the U.S. stock market is overvalued. The evidence they provide directly contradicts the still very strong bullish sentiment.

Is the Market in a Bubble? Weigh in on week’s poll question and don’t forget to share your thoughts!

LAST WEEK’S POLL RESULTS

Last week I asked you for your take on how things will play out for tariffs once incoming President-Elect Trump takes office on Monday. Here’s how that vote went, and a few reader comments explaining their thoughts.

Comments of the Week

🥊 Yes, retaliation will continue

“I expect trade tensions to rise in the short term and I hope Canada stands their ground and doesn't give Trump a single thing he wants. Trump will eventually back down because that's what bully's typically do when they receive pushback.
Full disclosure: I'm saying this as a U.S. citizen.” - callawayguy

“There is no denying that the U.S. want to move products and production inside their borders, and the tariffs are only the first point of attack.” - aelaan

“Negotiating with an unpredictable idiot is going to be difficult.” - gavinwaite

🕊️ No, cooler heads will prevail

“I think Trump is just baiting Trudeau and also he wants to establish his dominance. Once Poilievre gets in he will be able to bring some common sense to the table.” - storierod

MARKET BUBBLE?

Why Picton Mahoney Sees a Growing Equity Bubble

• Picton Mahoney warns of a potential stock market bubble forming.

• Equity valuations are rising beyond fundamental support levels.

• Investor optimism is high, driving speculative excesses.

• A correction could come if economic conditions shift, or sentiment weakens

If you fall into that camp that believes the current bull market will go on forever, I’m going to suggest you have a read through The 2025 Picton Report. It’s subtitled “Undeniable Froth: Navigating the Brewing Bubble” and it’s packed with information that might challenge your views.

The company is warning that equity markets are becoming increasingly overvalued, with speculation driving prices higher. The firm sees a growing disconnect between fundamentals and stock prices, (I do too) raising concerns about a potential market correction. Strong corporate earnings and economic resilience have supported recent gains, but Picton Mahoney believes that stretched valuations and excessive investor optimism could lead to volatility ahead.

A Market Fueled by Optimism

The current market rally has been driven by strong earnings, AI-fueled enthusiasm, and expectations of Fed rate cuts. Yes, these factors support higher valuations, but Picton sees warning signs of excessive risk-taking. The firm's analysts note that past bubbles have often formed in environments of low volatility and high investor confidence, and the way I see it, that’s pretty much aligned with current conditions.

What Could Cause the Bubble to Pop?

According to the report, a major shift in economic data, earnings growth, or Fed policy could be the catalyst for a downturn. If inflation remains sticky, forcing the Fed to delay further rate cuts, or if corporate earnings disappoint, investor sentiment could turn on a dime. Of course the markets might continue rising in the short term, but Picton Mahoney urges caution, emphasizing the importance of risk management. I couldn’t agree more. When this turn comes, and it will, it’s going to be a very, very sharp turn.

Read the Full Story here.

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TAXATION

CD Howe Calls Capital Gains Tax Uncertainty a ‘Kafkaesque Tax Quagmire’

• The lack of clarity on capital gains tax changes is unsettling markets.

• CD Howe calls the situation a "Kafkaesque tax quagmire."

• Investors and businesses are delaying financial decisions due to uncertainty.

• The institute urges the government to provide clear policy direction.

Novelist Franz Kafta died way back in 1924, but if he were alive today, he’d probably be working on his next book and it would be based on the nightmarishly bureaucratic capital gains saga currently working itself out in Canada.

The CD Howe Institute is now warning that ongoing uncertainty over potential capital gains tax changes in Canada is causing confusion among investors and businesses. We see no clear direction from policymakers, and the think tank argues that the uncertainty is deterring investment and could have long-term economic consequences. When I spoke with my accountant on this topic recently, he was almost losing his mind.

Investors Left in Limbo

Back in June of last year, the Canadian government announced tax changes to the capital gains inclusion rate but has yet to release a concrete plan. This lack of transparency is making it difficult for investors to make long-term decisions, and many are holding off on asset sales, while others are uncertain about new investments due to potential tax implications.

The Economic Fallout

CD Howe warns that if we see prolonged uncertainty, it could reduce capital formation and discourage business expansion. The organization is urging the government to clarify its stance on capital gains taxation and argues that a well-defined policy—whether higher or lower rates—would be better than the current ambiguity. Until that happens, businesses and investors will continue to operate in a fog of uncertainty.

Read the Full Story here.

HOUSING

Canadian Home Sales Expected to Rebound in 2025

• Home sales are projected to increase in 2025 as rates decline.

• Affordability remains a key barrier, but is improving.

• Prices are expected to stabilize, with moderate growth.

• Supply remains tight, keeping pressure on housing costs.

The Canadian Real Estate Association (CREA) is forecasting a modest rebound in home sales for 2025, following a challenging market in 2024. Lower interest rates and improving affordability are expected to bring buyers back into the market, although price gains may remain restrained.

Interest Rates Are the Key Factor

In its report, CREA says that as the Bank of Canada eases interest rates, more buyers will re-enter the market. High borrowing costs kept many on the sidelines in 2024, but even small reductions in rates could make a big difference in affordability. That said, CREA cautions that the rebound will likely be gradual rather than a sudden surge.

Housing Prices: Stability Over a Boom

While demand is expected to rise, my guess is that prices are unlikely to skyrocket. Affordability for many families is still stretched at current mortgage rates, and supply remains limited in a lot of markets. As a result, CREA predicts a balanced market, where home prices inch higher but don’t spike. The real estate market’s recovery will depend largely on how far the Bank of Canada moves on rate cuts in 2025.

Read the Full Story Here.

HOME INSURANCE
Insurance Rates Set to Rise Again in 2025

• Home and auto insurance premiums are expected to rise in 2025.

• Climate change is increasing costs, particularly in risk-prone areas.

• Inflation is also driving up repair and replacement costs.

• Some homeowners may face higher deductibles or reduced coverage.

The insurance industry is warning that Canadians should bracing for another jump in insurance rates, with climate-related disasters and inflation driving costs higher. Premiums for home and auto policies will continue rising, especially in areas prone to severe weather events.

The Climate Factor

Across Canada, severe weather events have led to higher claims payouts and this is forcing insurers to adjust their pricing models. In provinces hit hardest by floods, wildfires, and storms, homeowners may see double-digit premium hikes. And we’re just going to have to get used to it. Industry analysts warn that this trend is likely to continue as climate risks only grow.

Affordability Concerns and Coverage Changes

When we look beyond climate risks, rising material and labour costs are also pushing up premiums. Some insurers have been introducing higher deductibles or even limiting coverage in high-risk areas. Consumers would be advised to shop around for better deals and explore ways to reduce costs, such as bundling policies or investing in home upgrades that lower risk.

Read the Full Story Here.

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OTHER NEWS FROM THE PAST WEEK

Starbucks Policy Changes Spark Backlash
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Trump's Economic Policies Take Center Stage
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TD Bank Announces Leadership Overhaul
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Global Economy Braces for Uncertainty
Rising geopolitical tensions, inflation risks, and shifting trade policies are creating uncertainty for the global economy. The IMF warns that 2025 could bring significant volatility for markets worldwide.

Vanguard Fined Over $100M for Retirement Fund Violations
The SEC has fined Vanguard over $100 million for mismanaging target-date retirement funds. The settlement is an example of growing regulatory scrutiny of investment firms and their fiduciary responsibilities.

Hershey’s Canada to Discontinue Cherry Blossoms
Even though I haven’t had one in probably ten years, this news broke my heart. Cherry Blossoms, the classic Canadian chocolate treat, is being discontinued by Hershey’s Canada. Fans of the confectionery, me included, are expressing disappointment over the decision.

Market Movers

Top 10 Weekly Gainers

Top 10 Weekly Losers

10 Most Overbought Stocks

10 Most Oversold Stocks

The Relative Strength Indicator (RSI) can provide a signal that suggest a stock is either overbought or oversold.
📈A stock that has an RSI over 70 is considered to be in “overbought” territory. This might suggest that the stock is due for a pullback, however it is not a recommendation to sell.
📉A stock that is trading with an RSI below 30 is considered to be in “oversold” territory. This might suggest that the stock is due for a recovery, however it is not a recommendation to buy. Always perform your own due diligence.

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