Markets successfully navigated the first half of 2024 despite uncertainty on a number of fronts. The broad macro environment is flashing sturdy but below-potential growth, lingering inflation pressure and central banks that are reluctant to pivot to full-scale easing.
S. Technology and Communication Services stocks have maintained their momentum and are arguably the strongest asset class through mid-2024. These two sectors are each up nearly 30% in the S&P 500 after posting gains of more than 50% last year.
Canadian equities haven’t been able to match the firepower of the S&P 500—they just don’t have exposure to what has been working. While there have been some trouble spots—a tough bank earnings season and a bear-market in telecom—the TSX has still managed to scramble to a 4% gain with help from Resources.
Consumers
As we cross the halfway point of the year, what is the state of the consumer? It’s a different story in Canada than it is in the United States. South of the border, the consumer could still be described as resilient, but there are some signs of softening. Spending patterns have changed as some consumers have become more price-sensitive, especially in areas like travel and luxury purchases. But despite that adjustment, they are still spending, which is likely to continue to spur the economy and support earnings growth. In Canada, the consumer slow-down has been more pronounced. In general, Canadians are more highly leveraged than their American counterparts, meaning that higher interest rates—especially in the housing market—will have a greater impact on their pocketbooks. That’s why we’ve seen a greater downturn in the health of the consumer here, and why inflation has declined faster in Canada than it has in the U.S. Looking ahead, the schedule for interest rate cuts will be of great interest to consumers on both sides of the border. If the Bank of Canada (BoC) goes ahead with the expected two-to-three rate cuts in 2024, then that would provide some relief for Canadian consumers. In the U.S., the Federal Reserve (Fed) is unlikely to cut rates more than once this year in our opinion, but the outperformance of U.S. stock markets compared to the Canadian market has given the American consumer a bit of a wealth cushion.
Bottom Line: The U.S. consumer is softening but still relatively resilient, while the Canadian consumer is struggling more with higher interest rates.
Emerging Markets
Late last week, I returned from an information gathering visit to China, not dissimilar to the trip to India I’d taken in January. The timing of these trips is not coincidental, as a potential rotation within Emerging Markets (EM) has been a hot topic among certain investors this year. The recent election in India was a reminder of the country’s relative political stability (despite Prime Minister Narendra Modi’s failure to secure a majority government as most observers had expected). Longer-term, most of the indicators support the view that India is in a strong growth mode: it has the world’s largest population at over 1.4 billion,1 a young and growing middle class, and it is likely to receive a productivity boost from significant investment in infrastructure. Valuations may represent some risk in the short-term, but we view India as a long-term play. China, for its part, has certainly experienced some near-term headwinds, including a struggling property sector, weaker-than-expected consumer spending, and trade tensions with the U.S. that are unlikely to subside regardless of who wins the presidential election. The different dynamics between India and China tilt us more toward India in the short-term, and we do expect to increase the allocation to India within the EM sleeves of our portfolios sometime in Q3. That said, valuations in China are very attractive at the moment—so attractive, in fact, that our preference is to be underweight the rest of EM (ex-China and India) in order to increase our overweight to India while maintaining our China exposure.
Bottom Line: We are bullish on India’s growth prospects, but that doesn’t mean that we’re down on China over the long term.
U.S. Election
Last week’s U.S. presidential debate seemed to generate greater-than-usual public and media interest. In the lead-up to the debate, Donald Trump’s negative comments about President Biden had lowered the bar for Biden’s performance—despite Trump’s last-minute attempt to cast Biden as a skilled debater. Media consensus seemed to be that Biden nonetheless fell short of Democrats’ hopes, and that Trump had the stronger performance despite numerous false statements. Many reports also highlighted many voters’ dissatisfaction with both candidates, and speculated on the possibility that Biden could be replaced on the Democratic ticket by an alternative candidate like California governor Gavin Newsom. Markets were marginally up early the next morning but ended slightly down—so relatively muted overall. We’ll be watching the polls to see if the debate swayed public opinion in any significant way. For now, however, our takeaway is that despite markets’ fairly calm reaction, the debate could signal the beginning of election-related volatility—especially if a change at the top of the Democratic ticket becomes a real possibility. Regardless, we expect that volatility to continue through November.
Bottom Line: The jury is still out on whether the debate will move the polls, but either way, we expect election-related market volatility to pick up from here.
The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
Shifting to Neutral: The Case for Optimistic Caution
In early June, the Bank of Canada (BoC) became the first of the world’s major central banks to lower interest rates, cutting by 25 basis points. a day before the European Central Bank (ECB) made the same move. But in the United States, it is a different story.
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Why American consumers are holding on—and Canadians aren’t
July 2 to 5, 2024
Why American consumers are holding on—and Canadians aren’t
July 2 to 5, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Consumers
As we cross the halfway point of the year, what is the state of the consumer? It’s a different story in Canada than it is in the United States. South of the border, the consumer could still be described as resilient, but there are some signs of softening. Spending patterns have changed as some consumers have become more price-sensitive, especially in areas like travel and luxury purchases. But despite that adjustment, they are still spending, which is likely to continue to spur the economy and support earnings growth. In Canada, the consumer slow-down has been more pronounced. In general, Canadians are more highly leveraged than their American counterparts, meaning that higher interest rates—especially in the housing market—will have a greater impact on their pocketbooks. That’s why we’ve seen a greater downturn in the health of the consumer here, and why inflation has declined faster in Canada than it has in the U.S. Looking ahead, the schedule for interest rate cuts will be of great interest to consumers on both sides of the border. If the Bank of Canada (BoC) goes ahead with the expected two-to-three rate cuts in 2024, then that would provide some relief for Canadian consumers. In the U.S., the Federal Reserve (Fed) is unlikely to cut rates more than once this year in our opinion, but the outperformance of U.S. stock markets compared to the Canadian market has given the American consumer a bit of a wealth cushion.
Bottom Line: The U.S. consumer is softening but still relatively resilient, while the Canadian consumer is struggling more with higher interest rates.
Emerging Markets
Late last week, I returned from an information gathering visit to China, not dissimilar to the trip to India I’d taken in January. The timing of these trips is not coincidental, as a potential rotation within Emerging Markets (EM) has been a hot topic among certain investors this year. The recent election in India was a reminder of the country’s relative political stability (despite Prime Minister Narendra Modi’s failure to secure a majority government as most observers had expected). Longer-term, most of the indicators support the view that India is in a strong growth mode: it has the world’s largest population at over 1.4 billion,1 a young and growing middle class, and it is likely to receive a productivity boost from significant investment in infrastructure. Valuations may represent some risk in the short-term, but we view India as a long-term play. China, for its part, has certainly experienced some near-term headwinds, including a struggling property sector, weaker-than-expected consumer spending, and trade tensions with the U.S. that are unlikely to subside regardless of who wins the presidential election. The different dynamics between India and China tilt us more toward India in the short-term, and we do expect to increase the allocation to India within the EM sleeves of our portfolios sometime in Q3. That said, valuations in China are very attractive at the moment—so attractive, in fact, that our preference is to be underweight the rest of EM (ex-China and India) in order to increase our overweight to India while maintaining our China exposure.
Bottom Line: We are bullish on India’s growth prospects, but that doesn’t mean that we’re down on China over the long term.
U.S. Election
Last week’s U.S. presidential debate seemed to generate greater-than-usual public and media interest. In the lead-up to the debate, Donald Trump’s negative comments about President Biden had lowered the bar for Biden’s performance—despite Trump’s last-minute attempt to cast Biden as a skilled debater. Media consensus seemed to be that Biden nonetheless fell short of Democrats’ hopes, and that Trump had the stronger performance despite numerous false statements. Many reports also highlighted many voters’ dissatisfaction with both candidates, and speculated on the possibility that Biden could be replaced on the Democratic ticket by an alternative candidate like California governor Gavin Newsom. Markets were marginally up early the next morning but ended slightly down—so relatively muted overall. We’ll be watching the polls to see if the debate swayed public opinion in any significant way. For now, however, our takeaway is that despite markets’ fairly calm reaction, the debate could signal the beginning of election-related volatility—especially if a change at the top of the Democratic ticket becomes a real possibility. Regardless, we expect that volatility to continue through November.
Bottom Line: The jury is still out on whether the debate will move the polls, but either way, we expect election-related market volatility to pick up from here.
Positioning
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Shifting to Neutral: The Case for Optimistic Caution.
Footnotes
1 “UN DESA Policy Brief No. 153: India overtakes China as the world’s most populous country.” United Nations Department of Economic and Social Affairs, April 24, 2023.↩
Disclosures:
The viewpoints expressed by the Portfolio Manager represents their assessment of the markets at the time of publication. Those views are subject to change without notice at any time without any kind of notice. The information provided herein does not constitute a solicitation of an offer to buy, or an offer to sell securities nor should the information be relied upon as investment advice. Past performance is no guarantee of future results. This communication is intended for informational purposes only.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
Any statement that necessarily depends on future events may be a forward-looking statement. Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Although such statements are based on assumptions that are believed to be reasonable, there can be no assurance that actual results will not differ materially from expectations. Investors are cautioned not to rely unduly on any forward-looking statements. In connection with any forward-looking statements, investors should carefully consider the areas of risk described in the most recent simplified prospectus.
This article is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Investments should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
Commissions, management fees and expenses (if applicable) all may be associated with investments in mutual funds. Trailing commissions may be associated with investments in certain series of securities of mutual funds. Please read the fund facts, ETF facts or prospectus of the relevant mutual fund before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. Distributions are not guaranteed and are subject to change and/or elimination.
For a summary of the risks of an investment in the BMO Mutual Funds, please see the specific risks set out in the prospectus. ETF Series of the BMO Mutual Funds trade like stocks, fluctuate in market value and may trade at a discount to their net asset value, which may increase the risk of loss. Distributions are not guaranteed and are subject to change and/or elimination.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
Insights
Chairman Powell: The Ultimate Bond Villain?
Shifting to Neutral: The Case for Optimistic Caution
BMO ETF Portfolios’ June commentary: “Downshift to Neutral”
Counting on 24-Karat Rate Cuts
Bridging the “Alternatives Gap”
The Evergreen Solution