This week with Sadiq

U.S. vs. the world: where do investors have the most confidence?

December 09, 2024

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Market recap

  • Equity markets posted further gains this week and head into the end of 2024 on a bit of a heater.

  • The S&P 500 added 1.0%, with strong gains in Consumer Discretionary, Technology and Communication Services dampened by weakness in Energy, Materials and Utilities. The last month, or three, have seen a rotation firmly out of defensives and resources into more classic early-cycle sectors like those that outperformed this week.

  • With the S&P 500 pushing record highs, and that ongoing rotation at the sector level, there’s not a hint of anything spelling trouble for the economy in equity-market land.

Political turmoil

It’s been a stunning week in global politics, with major crises playing out on two continents. In France, Prime Minister Michel Barnier was ousted last Wednesday following a no-confidence vote in parliament. It was the first time in over 60 years that a French government had been toppled by parliament, and came only three months after Barnier had been appointed by President Emmanuel Macon.1 Now, Macron is faced with the difficult task of selecting a compromise candidate that can gain parliament’s support. South Korea, meanwhile, was shocked last Tuesday by President Yoon Suk Yeol’s declaration of martial law. Though the decree was quickly overturned by South Korea’s parliament, ramifications of the decision are continuing to unfold—Yoon survived an impeachment vote on Saturday, but many protestors are continuing to call for him to resign or be removed from office.2 And finally, in Syria, the regime of Bashar al-Assad—whose family had ruled the country for over 50 years—was toppled over the weekend, and it is unclear at present what kind of government will emerge to fill the vacuum.3 For investors, it’s reasonable to wonder whether these developments change the outlook for Europe, Australasia and the Far East (EAFE) or Emerging Markets (EM). For us, they do not, because we had already expected and planned for more geopolitical risk in the coming year. To be certain, the instability came sooner than we thought—our expectation was for an uptick once Donald Trump took office and potential tariffs were enacted—but it was nonetheless broadly in line with our forecast. We continue to believe that investors should monitor the global landscape and prepare for heightened geopolitical risk in 2025. In our view, having some defensive measures in a portfolio, whether in the form of gold or options, still makes sense.

Bottom line: While we do expect greater geopolitical risk in the months ahead, the recent crises in France, South Korea, and Syria don’t change our outlook for EAFE or EM—markets tend to digest these kinds of situations and then move on.

U.S. economy

Given all the risks in markets, including the geopolitical instability touched on previously, why do investors still seem to have so much faith in the U.S. economy? We suspect it’s because they perceive the U.S. as low-risk. Recent economic data, including another above-estimate jobs number last Friday,4 show the country to be on solid footing. Looking ahead, investors are asking whether Donald Trump’s policies, including likely new tariffs, will be helpful or harmful. But we prefer to ask a different question: what’s the floor for the U.S. economy? Let’s consider the relevant facts. In general, consumer confidence remains quite positive and retail sales have been fairly good. If Trump does introduce additional tariffs, as we expect, then that would likely provide a boost for the U.S. in the short term, as they would generate revenue and some trade flows would probably shift in America’s favour. In this scenario, there’s no question there would be more volatility, but the fundamentals would likely remain strong. Longer term, there would almost certainly be retaliatory tariffs—but for investors, that’s phase two and too early to act on without clarity.

Bottom line: The U.S. economy is still fairly strong, and for investors, that’s enough to overcome any longer-term geopolitical or trade-related uncertainty.

Technology

Last Friday, a U.S. appeals court upheld the ban on short-form-video app TikTok that had been passed by Congress and signed into law by President Joe Biden in April. While a lengthy appeals process is likely and incoming President Trump could overturn the ban before it goes into effect in January, the ongoing debate does highlight the pressure on Chinese-related Technology names. (TikTok is owned by the Chinese company ByteDance.) A potential TikTok ban has been in the news for more than a year, so the latest development comes as no surprise to investors. Nor does the ban represent a broad concern for the Technology sector—in our view, it’s primarily a company-level risk, with some country-level risk also being a factor. Ultimately, TikTok is being targeted for being a Chinese social media company, and that type of scrutiny won’t extend to Tech companies based in the West. If TikTok does ultimately get banned, our expectation is that Meta—which operates Facebook, Instagram, and Threads—would likely be a benefactor.

Bottom line: Even if TikTok is banned, we expect the broader impact on U.S. Tech to be minimal.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled “Trump bump”: Why markets have rose-coloured glasses on, for now.

Insights

READ ALL INSIGHTS

Sources

1Paul Kirby & Maia Davies, “Emmanuel Macron vows to name new French PM within days,” BBC, December 6, 2024.

2Koh Ewe, “Travel ban on S Korea president after martial law attempt,’ BBC, December 9, 2024.

3David Gritten, “What just happened in Syria?” BBC, December 8, 2024.

4Augusta Saraiva, “US Hiring Rebounds, But Rising Unemployment Keeps Fed Cut Alive,” Bloomberg, December 6, 2024.

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