Equity markets rallied this week, with a set of solid economic data working to calm recession fears.
The S&P 500 rose 3.9%, led by technology and consumer discretionary, while the TSX gained 3.3%.
The Q2 earnings season is winding down at a time when the market is questioning the resilience of the underlying economy.
Inflation
Last week, a much-anticipated Consumer Price Index (CPI) report was released which showed that U.S. inflation had declined to its lowest level in over three years; prices rose 2.9% year-over-year, which was better than analysts’ expectations. We think this is a positive report in that it likely puts the brakes on the panic that had taken hold of some investors. To repeat a comment I’ve made previously in this space: the economy is not as bad as some had thought. Even after the fiasco of two weeks ago, the consumer is still in relatively good shape—the retail sales report for July beat forecasts, and jobless claims fell for the second week in a row. Consumers are certainly adjusting what they’re spending on, but by no means are they stopping their spending. Walmart’s recent earnings looked good, which is further evidence of a shift to Consumer Staples from Discretionary by middle-income consumers, while the highest-end consumers still have savings and are continuing to spend on luxury items. Some companies, like Cisco, have announced major layoffs, but other companies are continuing to hire, which is resulting in the fairly consistent jobless claim numbers we’ve seen rather than a sudden increase in unemployment. Looking ahead, we expect to continue to see a mix of bullish and bearish economic data points, and some volatility in markets as a result. We still think a 25-basis-point interest rate cut from the U.S. Federal Reserve (Fed) in September is the most likely scenario, and the decent job numbers are further evidence that there’s no need for a 50-bps slash.
Bottom Line: While higher interest rates are having an impact, the U.S. consumer remains fairly resilient, and the economy is stronger that many were assuming.
Oil
Oil markets have been something of a roller coaster of late, as mixed economic signals, weak indicators from China, and ongoing conflict in the Middle East have seen prices struggle to cross $80 per barrel as they did earlier this summer. We’ve been consistent in saying that $70-$80 per barrel is the right range given current supply and demand dynamics—if prices get closer to $70, we’d consider buying, and if they approach $80, we’d consider taking profits. Of course, it is possible for prices to go beyond either of those two extremes. On the high side, political uncertainty and geopolitical risks could cause a spike, as we’ve seen occasionally over the past few years. Those spikes tend not to last long, however, making them an advantageous time to sell. On the lower end, there are worries about recession risks and a potential slowdown in demand. But in our view, we’re not at any significant risk of a severe downturn. Yes, it’s possible we could dip into a recession. But a soft landing remains the most likely scenario, in which case demand could be expected to hold up relatively well. On the supply side, we don’t expect oil production to be excessive by any means. Recent history shows that the Organization of Petroleum Exporting Countries (OPEC) only tends to cut production when prices dip below $70, so for now, we’re still in the sweet spot.
Bottom Line: We believe oil is fairly priced at present, and we don’t see any significant risks on the supply or demand side that are likely to significantly alter the market over the next few months.
Seasonality
Traditionally, this time of year—August, September, and October—tends to feature more negativity in markets. This is not true in election years, however, as political leaders use the policy levers at their disposal to try to ensure the best economic and financial backdrop for their election campaigns. Given how strongly markets moved up in the first six or seven months of the year, and the turbulence we’ve seen since, the dynamics this year may be different. With Kamala Harris now the Democratic nominee, the race has narrowed, and a Trump trade is fading. In addition to that political uncertainty, the next couple of weeks could bring less trading as investors take some vacation time before Labour Day. Our view is that it may be worthwhile to be cautious in the lead-up to the election. Right now, any major positioning changes would be a guess, so we think it makes sense to avoid taking on additional risk, continue to participate fully in markets, and adjust your portfolio as needed when the election is nearer. We believe rotation is better than a full exit.
Bottom Line: Elections years are typically good for markets, but markets’ strength over the first six-plus months of the year—and recent turbulence—make the next three months difficult to predict.
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.
What are the key takeaways from Fed Chairman Jerome Powell’s speech at Jackson Hole? What do recent earnings beats from Walmart and Target tell us about the strength of the consumer?
What have we learned since last week’s big stock market tumble? How would an accelerated rate cut schedule impact the bond market? And what is the state of the U.S. presidential race now that Kamala Harris has selected a running mate?
Peak earnings? Why an equity rotation may be nearing.
What are the big takeaways from the latest round of earnings announcements? How will Kamala Harris’ ascension to the top of the Democratic ticket impact the presidential race and markets?
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Why the U.S. economy is stronger than you think
August 19 to 23, 2024
Why the U.S. economy is stronger than you think
August 19 to 23, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Inflation
Last week, a much-anticipated Consumer Price Index (CPI) report was released which showed that U.S. inflation had declined to its lowest level in over three years; prices rose 2.9% year-over-year, which was better than analysts’ expectations. We think this is a positive report in that it likely puts the brakes on the panic that had taken hold of some investors. To repeat a comment I’ve made previously in this space: the economy is not as bad as some had thought. Even after the fiasco of two weeks ago, the consumer is still in relatively good shape—the retail sales report for July beat forecasts, and jobless claims fell for the second week in a row. Consumers are certainly adjusting what they’re spending on, but by no means are they stopping their spending. Walmart’s recent earnings looked good, which is further evidence of a shift to Consumer Staples from Discretionary by middle-income consumers, while the highest-end consumers still have savings and are continuing to spend on luxury items. Some companies, like Cisco, have announced major layoffs, but other companies are continuing to hire, which is resulting in the fairly consistent jobless claim numbers we’ve seen rather than a sudden increase in unemployment. Looking ahead, we expect to continue to see a mix of bullish and bearish economic data points, and some volatility in markets as a result. We still think a 25-basis-point interest rate cut from the U.S. Federal Reserve (Fed) in September is the most likely scenario, and the decent job numbers are further evidence that there’s no need for a 50-bps slash.
Bottom Line: While higher interest rates are having an impact, the U.S. consumer remains fairly resilient, and the economy is stronger that many were assuming.
Oil
Oil markets have been something of a roller coaster of late, as mixed economic signals, weak indicators from China, and ongoing conflict in the Middle East have seen prices struggle to cross $80 per barrel as they did earlier this summer. We’ve been consistent in saying that $70-$80 per barrel is the right range given current supply and demand dynamics—if prices get closer to $70, we’d consider buying, and if they approach $80, we’d consider taking profits. Of course, it is possible for prices to go beyond either of those two extremes. On the high side, political uncertainty and geopolitical risks could cause a spike, as we’ve seen occasionally over the past few years. Those spikes tend not to last long, however, making them an advantageous time to sell. On the lower end, there are worries about recession risks and a potential slowdown in demand. But in our view, we’re not at any significant risk of a severe downturn. Yes, it’s possible we could dip into a recession. But a soft landing remains the most likely scenario, in which case demand could be expected to hold up relatively well. On the supply side, we don’t expect oil production to be excessive by any means. Recent history shows that the Organization of Petroleum Exporting Countries (OPEC) only tends to cut production when prices dip below $70, so for now, we’re still in the sweet spot.
Bottom Line: We believe oil is fairly priced at present, and we don’t see any significant risks on the supply or demand side that are likely to significantly alter the market over the next few months.
Seasonality
Traditionally, this time of year—August, September, and October—tends to feature more negativity in markets. This is not true in election years, however, as political leaders use the policy levers at their disposal to try to ensure the best economic and financial backdrop for their election campaigns. Given how strongly markets moved up in the first six or seven months of the year, and the turbulence we’ve seen since, the dynamics this year may be different. With Kamala Harris now the Democratic nominee, the race has narrowed, and a Trump trade is fading. In addition to that political uncertainty, the next couple of weeks could bring less trading as investors take some vacation time before Labour Day. Our view is that it may be worthwhile to be cautious in the lead-up to the election. Right now, any major positioning changes would be a guess, so we think it makes sense to avoid taking on additional risk, continue to participate fully in markets, and adjust your portfolio as needed when the election is nearer. We believe rotation is better than a full exit.
Bottom Line: Elections years are typically good for markets, but markets’ strength over the first six-plus months of the year—and recent turbulence—make the next three months difficult to predict.
Positioning
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Only fools rush in (or out): Caution calls for a rotation, not exit.
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
The Fed’s most dovish tone yet?
Only fools rush in (or out): Caution calls for a rotation, not exit
Riding the market’s roller coaster
BMO ETF Portfolios’ August commentary: “Special Report: Summer Sell-Off Rattles Risk Assets”
Markets plummeted. Here’s what you need to know.
Peak earnings? Why an equity rotation may be nearing.