Big interest rate declines, strong bank stocks and more market predictions for the year ahead

financialpost.com:

Making public market predictions is a bit of a mug’s game. Any market/economic prediction is, at best, a guess (note that we did not even say educated guess here), yet investors’ inboxes are still being filled with predictions for the next year.

We try not to make predictions, since public predictions in the internet age are going to be out there forever, and we don’t want to become a meme for having a prediction that is so wildly off it is funny. But investors seem to like them — and our editor told us to make some — so here we go (under protest).

I don’t often agree with my fellow columnist David Rosenberg, but this time we do. He recently argued that rates are going to drop, and drop fast. Most economists, conversely, believe rates will take a much slower approach downward. We think Rosenberg has nailed this one: Inflation is all but disappearing in Canada, and interest rates themselves (through mortgage interest costs) are one of the key components of inflation.

As rates fall, even a bit, there is a corresponding decrease in inflation. This could set up a virtuous cycle of declining inflation and declining rates. This, combined with weak economic growth in Canada (see below) could mean big declines in interest rates in this country. If we are right on this call, it will also mean a lower Canadian dollar.

Corporate earnings declined for three consecutive quarters starting in late 2022 and continued earlier this year. Then, for the third quarter, growth nicely resumed once again.

To understand this, put yourself in the shoes of a business owner. You were worried all year about higher inflation and higher interest rates, and you couldn’t open your inbox without seeing doom-and-gloom calls about a recession. What do you