BMO ETF Portfolios’ December commentary: “There’s a New Tariff in Town”

Portfolio Activity

• Increased equity overweight: given a Republican trifecta and its focus on deregulation, tax cuts, and other pro-business policies, we dialed up equity overweight with the majority in the U.S.

• Increased fixed income duration: we think the run-up in Canada’s 10-year yield after the U.S. election results is over-stretched given its weaker macroeconomic outlook vs. the U.S.

• Added small USD hedge: we think the recent CAD weakness is overblown after Trump’s 25% tariff threat on Canadian exports. In our view it is unlikely to materialize.

• Our equity overweight vs fixed income paid off.

“There’s a New Tariff in Town”

T’was the weeks before Christmas…and it wasn’t exactly quiet.

Over the past month, the threat of tariffs became real, and sooner than expected, but oddly first directed at the two economies with which the U.S. shares both borders and the highest total trade, Canada and Mexico. The integration of the North American economy is so entwined, one has to wonder if the net benefits of any such tariffs would really be of benefit to the U.S. economy. Rather than any trade deficit or critical industries being protected, the stated justification was aimed purely at illegal immigration and smuggling of fentanyl from China, two high profile Trump campaign targets. Despite being by far the lesser contributor to either problem, Canada was lumped in with Mexico by virtue of the existence of the United States-Mexico-Canada Agreement (USMCA) which was scheduled for review in the fourth quarter of 2025 anyway. Between U.S. dependence on Canadian energy, or the almost genetic interdependence of all three countries in the auto sector, this is certainly a case where it is hoped that the bark is indeed worse than any bite.

Other items that made the naughty and nice list over the month:

• Equity markets continued to grind higher, with the S&P 500 generating a 5.7% return for November, lagging the TSX which beat with a 6.2% increase (price indices, local currency). China dragged down the broader Emerging Market index, falling 4.4% and 3.7%, respectively. EAFE equities fell a slight 0.7%, impacted by volatility related to the French non-confidence vote that saw Prime Minister Michel Barnier ousted over his tabled budget.

• A ceasefire in Lebanon eased upward pressure on oil prices, despite there being no immediate prospects for reduced active engagement in Gaza. Shortly thereafter, Russia’s overtures of the use of ICBM (intercontinental ballistic missile) nuclear strikes should Ukraine continue pressing on Russian assets had the opposite effect. Finally, OPEC (Organization of the Petroleum Exporting Countries) again deferred planned output cuts, capping crude’s potential near-term upside, a green flag for subdued inflation. Overall, we remain bearish on the prospects for oil prices into next year.

• October’s inflation data showed U.S. Core PCE (personal consumption expenditures) at 0.3% month-over-month and 2.8% year-over-year, as higher stock prices actually feed into this measure via financial services fees, unlike the traditional CPI (consumer price index) basket. October U.S. consumer spending was up slightly. With 50 basis points (bps) not just off the table, but following the meatball right out the door, market odds for even a 25 bp U.S. Federal Reserve (“Fed”) cut on Dec 18 stood just above even as of Nov 27^th.

• November payrolls came out pretty much bang on expectations at 227,000 versus consensus 220,000. The unemployment rate slid one tenth to 4.1%, while average hourly earnings came in a bit hot at 0.4% month-over-month, keeping the December Fed rate decision live and on track for 25 bps.

Overall, there were no major changes to our house view over the month, with only slight adjustments around our primary themes of overweight equities and U.S. leadership, which we expect to continue well into 2025. As we end 2024, we are also completing two exceptionally strong years for markets, both equities and fixed income. From the lows of October 2022 to the time of writing (Dec 12, 2024), the S&P 500 Total Return Index has risen an incredible 75.9%, a 29.8% annualized return, in USD. In CAD, 29.4%. For reference, the annualized return since 1990 has been 10.8%, and when converted to CAD, 11.8%. (All returns as of close 12/11/2024). Back-to-back years of such strong performance are quite common historically, but three in a row is tougher to expect. That said, with consensus earnings growth of just over 12% for the S&P 500, and average targets of 6,800(ish) by year’s end (an 11% gain from here), 2025 should prove to be fairly merry and bright…assuming it isn’t hijacked by a nefarious grinch-like event.
(Data sourced from Bloomberg, 2024)