BMO ETF Portfolios’ November commentary: “Calling Trump, Going Alone”

Portfolio Activity

• In short, the BMO ETF portfolios were well positioned for the U.S. Election result. Overweight positions in U.S. Equal Weight Banks and U.S. Industrials have outperformed the broader market, while hedges implemented on our gold bullion position following it’s rise above $2700 USD/oz are buffering its pullback. Our general overweight of equities has also benefitted relative performance over the month.

• The house view has upgraded equities to a tactical score of +2 (bullish), emphasizing U.S. above all else, with Canada neutral, funded by underweights of EAFE – Europe, Asia and the Far East (mostly Europe) and Emerging Markets, where the larger impact of U.S. tariffs will most likely be felt.

• We are reducing our exposure to fixed income overall, and shifting slightly more in favour of U.S. credit. While the near-term trajectory for rates is higher than previously expected, we believe that yields may have moved a bit too aggressively in the days following the election. More specifically, we believe Canada’s rate trajectory remains relatively unaffected, and maintain a slight overweight of duration among the core Canadian bond holdings.

“Calling Trump, Going Alone”

With November rains washing away memories of the last of summer’s cottage Euchre games, we now turn our attention to what 2025 will bring, and it is bringing Donald Trump back to the White House as the 47th President of the United States of America. Following a narrow campaign punctuated with the Democrat’s replacement of the incumbent President Biden with VP Kamala Harris, to the attempted assassination of Trump, the result was expected to be in question for weeks as votes were closely counted. However, a decisive victory in both the popular and electoral votes has resulted in a Red Wave (well, perhaps more of a Red Splash, given the narrow majority expected in the House) that will support Trump’s promised agenda of tariffs, stricter immigration policy and tax reduction.

Markets reacted quickly and clearly: equities up on lower taxes, bonds down on higher rates from inflationary impact of tariffs. Along with the higher rates came a stronger U.S. dollar (USD), contrary to the expected longer-term devaluation expected with increased U.S. deficits under projected fiscal spending. USD-priced assets like gold and oil moved lower, not just on currency but on expectations of higher real rates and looser U.S. energy regulation and output. Among the leading sectors of the S&P 500 Index, Banks and Industrial spiked post-election, as did Consumer Discretionary, the home of Tesla and Mr. Trumps largest CEO supporter, Elon Musk. Joining the celebration, Bitcoin surged north of $81,000, with renewed street targets of six figures, recalling Mr. Trump’s campaign comments to promote the government’s use of the cryptocurrency and support of related businesses. (Bloomberg, 2024)

Only two short days later, the U.S. Federal Reserve delivered a 25 basis point cut in policy rates that was widely expected, although visibility of its path forward has blurred considerably. Specifically, will the U.S. Federal Reserve (“Fed”) be able to (need to?) continue cutting rates should inflation indeed return, given the stated inflationary potential of the Republican agenda? The expected terminal rate (ie, lowest expected level for the Fed rate this cutting cycle) has moved higher, and market pricing for rate cuts throughout 2025 has dropped substantially. That said, it is possible that the market is overestimating the magnitude, but more importantly, the duration of any tariffs imposed by the U.S. on foreign trading partners as concessions might be more quickly negotiated given prior experiences with Mr. Trump’s administration. That first bark from a big dog can be unnerving, but nothing offering up a t-bone steak doesn’t quiet pretty quickly.

Additionally, a strong U.S. dollar is in itself deflationary, given the trade imbalance that emphasizes U.S. imports, but not particularly good for exports, nor the earnings of S&P 500 companies with a large proportion of foreign revenues. One area that is reflecting that, along with general increased market liquidity is small-caps, which are more domestically focused, and finally realizing catalysts to unlock their relative valuation advantage versus large caps. In particularly, smaller regional banks have surged, reflecting lower expectations of capital restrictions and lower overall taxes. Small cap industrials will also benefit from increased “America First” purchasing initiatives, as well as government subsidies supporting onshoring of existing supply chains.

And with respect to the second half of this month’s title, U.S. equity leadership is a clear theme for the next several months on our collective view. We have moved our score of Canadian equities higher, on expectations of increased economic activity next year, as well as net benefits of a turbocharged U.S. economy. Additionally, we expect continued rate decorates from the Bank of Canada, which hopefully will ease the impact of mortgage renewals in 2025 and beyond. We are most concerned now about Europe, with Germany in particular being a problem, as tariffs impacting the automotive sector and broader manufacturing declines will be a key challenge in the years ahead. China also remains a question, being Mr. Trump’s preferred target for tariffs, but the government there has already responded to his win with increased stimulus measures totalling 10 trillion yuan (about $1.4 trillion USD) to support local governments in their debt management.

To sum up, the world is changing. In some ways drastically, and in others, not so much. For now, sentiment is strong and prospects of an equity rally into year-end are high, and we are positioning accordingly. At time of writing, the final determination of the Republican’s house majority awaits, requiring only 4 wins of the 18 outstanding ballot counts. Be prepared for a busy 2025, for both markets and investors around the world. We here at BMO Global Asset Management (BMO GAM) certainly are.