Markets endured a choppy week, as record highs for some equity indices gave way amid trade concerns in the chip sector, and the disruption from a global IT-related outage.
The events of the past week, namely the assassination attempt of Donald Trump, have forced markets to dust off their scenario templates.
Indeed, the incident has translated into higher odds of a Trump victory across betting markets, which now average roughly 60% based on an aggregation done by RealClearPolitics. That’s up sharply from just under 50% as of early June. (Note: these figures were calculated prior to President Biden deciding not to run for re-election.)
Presidential Election
On Sunday, U.S. President Joe Biden officially pulled out of November’s election. In our view, this appears to have been the right move strategically for Democrats—Biden was polling poorly post-debate—but it may be too little, too late. Biden’s endorsement of Vice President Kamala Harris makes her the leading candidate for the nomination, and she likely represents Democrats’ best chance to improve their standing in polls. Donations coming into Harris’ campaign after the announcement—almost $50 million in only a few hours—support this view, demonstrating that Democratic supporters are energized by the change (though it is not yet official).
That said, we still view Donald Trump as the odds-on favourite in November given how late in the election cycle the switch was made. It does improve the Democrats’ chances, however, and no scenario should be ruled out. Early market reaction to the announcement has been positive; indications are that the retreat we saw last week—particular in Technology (more on this below)—appears to be reversing today. This is a dynamic situation that is still unfolding, and I will have more to say on it in the coming days and weeks.
Bottom Line: Markets have reacted positively to the decision so far, and while Trump may still be the favourite, this likely improves Democrats’ chances in November.
Technology
Recent volatility in Tech stocks—including last week’s slump—appears to be related to concerns around semiconductors and a potential chip war between the United States and China. Why is this making the market so nervous? Before last week, we’d seen an enormous run-up in the chip-related names, especially those focused on artificial intelligence (AI). Thus far, their story has been virtually flawless, and demand is clearly there. But is there cause for concern on the supply side? Our portfolio managers recently went to China to investigate that very question, and they discovered that everything looked good—there’s little reason to think that the key companies will have trouble acquiring the chips they need.
The one issue that emerged more forcefully last week relates to Taiwan and the potential escalation of trade tensions between the U.S. and China under a Trump administration; in an interview with Bloomberg, Trump suggested that Taiwan should pay the U.S. for its defense, causing shares of the Taiwan Semiconductor Manufacturing Company (TSMC) to fall. With Tech stocks having encountered so few speedbumps, it’s not surprising that a slight shock would temporarily destabilize the market. Some investors are viewing the situation as a delay in earnings.
You can think of this two ways: either multiples need to come down, meaning the stocks are overpriced, or since the risk is not demand-related, it means getting the same Tech names at a discount. We lean towards the latter as these are long-term themes we want to own. Our expectation is that more volatility is likely as the U.S. presidential election approaches, especially given the shakeup on the Democratic ticket and the fact that Trump’s VP pick, J.D. Vance, is aligned with him on trade issues. That said, in our view, the on-the-ground fundamentals for Tech and AI remain strong.
Bottom Line: Demand for Tech and AI hasn’t changed, so even if there are some supply hurdles, it doesn’t materially affect those companies’ story.
Oil
Last month, the Organization of Petroleum Exporting Countries (OPEC) decided to boost oil production, prompting questions about the outlook for crude prices. Our expectation is that OPEC is likely to continue to increase supply to the marketplace because they had restricted it for so long. Prices have risen enough that they can afford a pullback, and the recession that was expected—and which probably played a role in their forecast—never arrived. There is also internal pressure to raise supply in many of the OPEC member states so that they can capture greater revenue. From OPEC’s perspective, you can ask countries to cut supply for a period of time, but not indefinitely. Overall, our outlook hasn’t changed significantly—we view $80-$90 per barrel as the sweet spot based on supply and demand, and barring a significant political shock, we expect trading in that range to continue.
Bottom Line: Despite OPEC’s recent announcement, we remain neutral on oil.
Bank of Canada
The Bank of Canada (BoC) meets again this week, and the numbers appear to be aligned for another interest rate cut. Data shows that there’s softness in the consumer and softness in economic growth. Combined with a decline in housing prices, that’s likely to affect consumer confidence, which will ultimately impact spending. Overall, inflation is still heading in the right direction despite one or two differing data points. The U.S. Federal Reserve (Fed) also appears likely to cut rates in September, which helps; the BoC tends not to stray too far from the Fed, and lower U.S. inflation data will have an impact on Canadian prices.
In recent months, we’ve discussed consumer spending extensively in this space, especially the shift from Consumer Discretionary to Consumer Staples. This month, we saw higher consumer spending, yet two luxury brands (Hugo Boss and LVMH) provided lower guidance. This means that even the high-end consumer may be cutting into their excess savings. If that’s the dynamic in the U.S. and globally, it will have implications for the consumer in Canada as well.
Bottom Line: We expect the BoC to cut rates this week, and we think it’s the right move.
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.
Politics and profits: Finding wins in an election year
The bad news is that the economic environment is worse than it was one year ago. The good news is that it is still in a pretty strong position and we’re not seeing any signs in the marketplace worrisome enough to warrant taking significant risk off the table.
Should investors consider rotating into equities with smaller market capitalizations? What did the latest CPI report tell us about the odds of a September rate cut? And where along the yield curve should investors look for opportunities?
BMO ETF Portfolios’ July commentary: “Take the Money and Run, or Take it Easy?”
With the end of the month, quarter and first half of 2024 in the books, markets seem to be taking a collective deep breath in anticipation of what the remainder of the year will bring.
What did we learn from the Fed’s reaction to the latest inflation data? How will election-related volatility manifest, and how big of an impact could it have on markets?
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Biden pulls out. What next?
July 22 to 26, 2024
Biden pulls out. What next?
July 22 to 26, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Presidential Election
On Sunday, U.S. President Joe Biden officially pulled out of November’s election. In our view, this appears to have been the right move strategically for Democrats—Biden was polling poorly post-debate—but it may be too little, too late. Biden’s endorsement of Vice President Kamala Harris makes her the leading candidate for the nomination, and she likely represents Democrats’ best chance to improve their standing in polls. Donations coming into Harris’ campaign after the announcement—almost $50 million in only a few hours—support this view, demonstrating that Democratic supporters are energized by the change (though it is not yet official).
That said, we still view Donald Trump as the odds-on favourite in November given how late in the election cycle the switch was made. It does improve the Democrats’ chances, however, and no scenario should be ruled out. Early market reaction to the announcement has been positive; indications are that the retreat we saw last week—particular in Technology (more on this below)—appears to be reversing today. This is a dynamic situation that is still unfolding, and I will have more to say on it in the coming days and weeks.
Bottom Line: Markets have reacted positively to the decision so far, and while Trump may still be the favourite, this likely improves Democrats’ chances in November.
Technology
Recent volatility in Tech stocks—including last week’s slump—appears to be related to concerns around semiconductors and a potential chip war between the United States and China. Why is this making the market so nervous? Before last week, we’d seen an enormous run-up in the chip-related names, especially those focused on artificial intelligence (AI). Thus far, their story has been virtually flawless, and demand is clearly there. But is there cause for concern on the supply side? Our portfolio managers recently went to China to investigate that very question, and they discovered that everything looked good—there’s little reason to think that the key companies will have trouble acquiring the chips they need.
The one issue that emerged more forcefully last week relates to Taiwan and the potential escalation of trade tensions between the U.S. and China under a Trump administration; in an interview with Bloomberg, Trump suggested that Taiwan should pay the U.S. for its defense, causing shares of the Taiwan Semiconductor Manufacturing Company (TSMC) to fall. With Tech stocks having encountered so few speedbumps, it’s not surprising that a slight shock would temporarily destabilize the market. Some investors are viewing the situation as a delay in earnings.
You can think of this two ways: either multiples need to come down, meaning the stocks are overpriced, or since the risk is not demand-related, it means getting the same Tech names at a discount. We lean towards the latter as these are long-term themes we want to own. Our expectation is that more volatility is likely as the U.S. presidential election approaches, especially given the shakeup on the Democratic ticket and the fact that Trump’s VP pick, J.D. Vance, is aligned with him on trade issues. That said, in our view, the on-the-ground fundamentals for Tech and AI remain strong.
Bottom Line: Demand for Tech and AI hasn’t changed, so even if there are some supply hurdles, it doesn’t materially affect those companies’ story.
Oil
Last month, the Organization of Petroleum Exporting Countries (OPEC) decided to boost oil production, prompting questions about the outlook for crude prices. Our expectation is that OPEC is likely to continue to increase supply to the marketplace because they had restricted it for so long. Prices have risen enough that they can afford a pullback, and the recession that was expected—and which probably played a role in their forecast—never arrived. There is also internal pressure to raise supply in many of the OPEC member states so that they can capture greater revenue. From OPEC’s perspective, you can ask countries to cut supply for a period of time, but not indefinitely. Overall, our outlook hasn’t changed significantly—we view $80-$90 per barrel as the sweet spot based on supply and demand, and barring a significant political shock, we expect trading in that range to continue.
Bottom Line: Despite OPEC’s recent announcement, we remain neutral on oil.
Bank of Canada
The Bank of Canada (BoC) meets again this week, and the numbers appear to be aligned for another interest rate cut. Data shows that there’s softness in the consumer and softness in economic growth. Combined with a decline in housing prices, that’s likely to affect consumer confidence, which will ultimately impact spending. Overall, inflation is still heading in the right direction despite one or two differing data points. The U.S. Federal Reserve (Fed) also appears likely to cut rates in September, which helps; the BoC tends not to stray too far from the Fed, and lower U.S. inflation data will have an impact on Canadian prices.
In recent months, we’ve discussed consumer spending extensively in this space, especially the shift from Consumer Discretionary to Consumer Staples. This month, we saw higher consumer spending, yet two luxury brands (Hugo Boss and LVMH) provided lower guidance. This means that even the high-end consumer may be cutting into their excess savings. If that’s the dynamic in the U.S. and globally, it will have implications for the consumer in Canada as well.
Bottom Line: We expect the BoC to cut rates this week, and we think it’s the right move.
Positioning
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Politics and profits: Finding wins in an election year.
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
Politics and profits: Finding wins in an election year
Is it time to swap Big Tech for Small Caps?
BMO ETF Portfolios’ July commentary: “Take the Money and Run, or Take it Easy?”
What can politics do to your portfolio?
Why American consumers are holding on—and Canadians aren’t
Chairman Powell: The Ultimate Bond Villain?