As we were already well diversified in the portfolios, we made very few changes in the allocation tilts in the past month, remaining overweight equities, with associated downside protection in the form of put options on the S&P500 Index, which provided a relative buffer to the full impact of the market pullback. We are holding this protection headed into the June U.S. Federal Reserve Board meeting, as markets continue to be hypersensitive to any potential shifts in the trajectory for policy rates.
Chinese equities have continued to grind higher, helping Emerging Markets equities lead in April, while Canadian and EAFE equities also outperformed the U.S., as the rotation away from technology and “Magnificent 7” [a group of high-performing U.S. stocks including Microsoft (MSFT), Amazon (AMZN), Meta (META), Apple (AAPL), Google parent Alphabet (GOOGL), Nvidia (NVDA), and Tesla (TSLA)] names favoured less expensive markets and sectors. There has been a relief rally on oversold conditions in the first week of May, but our belief is that this rotation will continue to be a longer-term theme throughout 2024.
Our addition to Healthcare last month was unfortunately coincident with some company-specific events that significantly impacted first quarter earnings reporting for the sector, with the detraction of Bristol Myers overshadowing the favourable upside surprises across the rest of the sector. However, consensus estimates for earnings-per-share growth in the sector is more than double that of the S&P500 Index for the next three quarters, driven primarily by continued revenue expansion, continuing the pattern of market-leading upside surprises seen in the first quarter.
“Jerome and the very topsy, turvy market”
Once upon a time, in a strange forest of curious creatures, there was a man named Jerome, who called a meeting…
Jerome: “The economy’s growth was far lower than expected, and fewer people got hired last month”.
Investors: “YAAAAYYYYY!”
Jerome: “No, wait….”
OK, perhaps a bit simplistic, but following a stormy April, markets returned to the “bad news is good news dynamic”, following the U.S. Federal Reserve Board’s decision to hold rates, coupled with sufficiently dovish commentary to at least take rate hikes off the table, ending a relatively modest pullback in equities.
First quarter 2024 (the “quarter”) earnings season, while mostly surprising to the upside on consensus earnings-per-share estimates, has been less convincing on the top line, with revenue beats coming in below historical average. Disappointments from bellwether stocks like Tesla Inc., and Meta were a large part of the broader market sell off in April, before recovering in the face of cooler economic data. U.S. jobs numbers came in far below expectations. The heavy lifting was borne mostly by the Health and Education sectors, with a notable uptick in Trade, Transportation and Utilities roles. White collar positions in Information Technology and Business Services posted net losses. This resulted in a 10 basis point (bp) increase in unemployment to 3.9%, while further tempering of growth was seen in hourly wages, which rose 0.2% versus the 0.3%.
The downside surprise in GDP growth this quarter was also a key shift, at only 1.6% year over year versus the consensus call for 2.5%, although a look beneath the surface showed this largely to be a function of inventories and net exports, with PPI U.S. Final Demand remaining quite strong at 2.1%.
All told the S&P500 Index saw a 5.5% pullback from this year’s peak in March before inflecting back upward, leaving the market only 1.3% shy of recovering (at time of writing). Bonds were even more dramatic in their volatility (the measure of how much the price of a security, derivative, or index fluctuates), with the benchmark U.S. 10-year Treasury yield surging roughly 50 bps to close at 4.72%, before coming back in below 4.50% in early May. The question now is whether that was the first crack in the bull market’s armor, or merely an ordinary corrective event that should be viewed as an opportunity to buy equities rather than sell?
Our collective bias still favours equities over fixed income, albeit with a healthy dose of cautious diversification and risk management overlay, (ie, option strategies). While economic trends, corporate fundamentals and even policy seem to be broadly positive, there is no denying a heightened sensitivity among investors to any potential change, particularly the trajectory of central banks’ monetary policy decisions. Couple that with the seasonal effects of summer, when lower volumes can lead to oversized market moves, and what is sure to be an “entertaining” U.S. presidential election season, it just makes sense not to take oversized bets in any one area of a portfolio.
Indeed, the broadening of markets year-to-date (YTD) allows for a certain degree of comfort, as flows to other regions, namely Europe and Japan, and more recently, even China have taken some of the concentration edge off U.S.-dominated global returns. Similar broadening at the sector level has helped our exposures to Industrials and Financials YTD, while the Materials and Energy sectors have boosted Canadian equity returns to the point of matching that of the equal-weighted S&P500 Index. Gold has taken a bit of a breather following it’s parabolic YTD returns, but we remain long-term holders, managing shorter term risk with an option spread to generate yield while purchasing downside insurance.
Disclaimers:
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the fund 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 BMO Mutual Funds, please see the specific risks set out in the prospectus.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
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.
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. 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.
This material is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
“BMO (M-bar roundel symbol)” is a registered 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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BMO ETF Portfolios’ May commentary: “Jerome and the very topsy, turvy market”
May 16, 2024
BMO ETF Portfolios’ May commentary: “Jerome and the very topsy, turvy market”
May 16, 2024
Steven Shepherd, CFA
Portfolio Activity
“Jerome and the very topsy, turvy market”
Once upon a time, in a strange forest of curious creatures, there was a man named Jerome, who called a meeting…
Jerome: “The economy’s growth was far lower than expected, and fewer people got hired last month”.
Investors: “YAAAAYYYYY!”
Jerome: “No, wait….”
OK, perhaps a bit simplistic, but following a stormy April, markets returned to the “bad news is good news dynamic”, following the U.S. Federal Reserve Board’s decision to hold rates, coupled with sufficiently dovish commentary to at least take rate hikes off the table, ending a relatively modest pullback in equities.
First quarter 2024 (the “quarter”) earnings season, while mostly surprising to the upside on consensus earnings-per-share estimates, has been less convincing on the top line, with revenue beats coming in below historical average. Disappointments from bellwether stocks like Tesla Inc., and Meta were a large part of the broader market sell off in April, before recovering in the face of cooler economic data. U.S. jobs numbers came in far below expectations. The heavy lifting was borne mostly by the Health and Education sectors, with a notable uptick in Trade, Transportation and Utilities roles. White collar positions in Information Technology and Business Services posted net losses. This resulted in a 10 basis point (bp) increase in unemployment to 3.9%, while further tempering of growth was seen in hourly wages, which rose 0.2% versus the 0.3%.
The downside surprise in GDP growth this quarter was also a key shift, at only 1.6% year over year versus the consensus call for 2.5%, although a look beneath the surface showed this largely to be a function of inventories and net exports, with PPI U.S. Final Demand remaining quite strong at 2.1%.
All told the S&P500 Index saw a 5.5% pullback from this year’s peak in March before inflecting back upward, leaving the market only 1.3% shy of recovering (at time of writing). Bonds were even more dramatic in their volatility (the measure of how much the price of a security, derivative, or index fluctuates), with the benchmark U.S. 10-year Treasury yield surging roughly 50 bps to close at 4.72%, before coming back in below 4.50% in early May. The question now is whether that was the first crack in the bull market’s armor, or merely an ordinary corrective event that should be viewed as an opportunity to buy equities rather than sell?
Our collective bias still favours equities over fixed income, albeit with a healthy dose of cautious diversification and risk management overlay, (ie, option strategies). While economic trends, corporate fundamentals and even policy seem to be broadly positive, there is no denying a heightened sensitivity among investors to any potential change, particularly the trajectory of central banks’ monetary policy decisions. Couple that with the seasonal effects of summer, when lower volumes can lead to oversized market moves, and what is sure to be an “entertaining” U.S. presidential election season, it just makes sense not to take oversized bets in any one area of a portfolio.
Indeed, the broadening of markets year-to-date (YTD) allows for a certain degree of comfort, as flows to other regions, namely Europe and Japan, and more recently, even China have taken some of the concentration edge off U.S.-dominated global returns. Similar broadening at the sector level has helped our exposures to Industrials and Financials YTD, while the Materials and Energy sectors have boosted Canadian equity returns to the point of matching that of the equal-weighted S&P500 Index. Gold has taken a bit of a breather following it’s parabolic YTD returns, but we remain long-term holders, managing shorter term risk with an option spread to generate yield while purchasing downside insurance.
Disclaimers:
Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the fund 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 BMO Mutual Funds, please see the specific risks set out in the prospectus.
BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.
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.
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. 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.
This material is for information purposes. The information contained herein is not, and should not be construed as, investment, tax or legal advice to any party. Particular investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
“BMO (M-bar roundel symbol)” is a registered 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