Equity markets struggled this week after expectations of early-2024 rate cuts met the reality that those cuts are likely still some time off.
The S&P 500 fell 1.5% on the week, with weakness in technology and consumer discretionary offsetting gains in health care and utilities.
Meantime, the TSX gave back just 0.1%, with solid gains in telecom and energy lending support, while technology and consumer stocks fell.
Stock Markets
Equity markets have gotten off to a notably slow start in 2024, with the S&P 500 experiencing three consecutive days of declines—the first time that’s happened at the start of a new year since 20151. Does this signal where markets are heading over the next 12 months? In our view, it’s not necessarily a sign of where markets will end up, but it is a sign of how we might get there: expect more volatility in 2024 than we saw in 2023. In Q4, there was a nice year-end rally, which was made possible by the U.S. Federal Reserve’s (Fed) pivot away from rate hikes and toward eventual interest rate cuts. This rally, however, may have inflated investors’ expectations, leading them to believe that the market environment is more promising than it actually is. Viewed through that lens, markets’ sluggish start to the year is a splash of cold water. That said, we still expect markets to be higher—even with more volatility potentially on the horizon.
Bottom Line: While markets are likely to be more volatile in 2024, the slow start to the year may simply be people taking off some profits after a strong end to 2023.
Interest Rates
Turning to bonds: rate cuts are still the expectation, which would signal a better environment for bonds in 2024, though the magnitude of those cuts remains in question. The recently-released minutes from the Fed’s last meeting seemingly confirmed this rosier outlook, revealing that internally, they aren’t expecting any more rate hikes. The timing of cuts is still the big question. The Fed minutes would seem to indicate that three rate decreases are planned for 2024. Markets, however, are pricing in even more cuts and are expecting at least one decrease as early as March. We think it’s unlikely that the Fed eases rates in Q1, and if we see a cut in Q2, it’s likely to be later in the quarter. The Bank of Canada (BoC) may decrease rates sooner, but the Canadian economy and consumer are weaker than their American counterparts, so it’s not an apples-to-apples comparison. Central banks’ cadence is supposed to be: 1) higher rates; 2) a pause; and 3) rate cuts. Too many investors seem to be skipping the pause and going directly to the rate cut story, which is creating unrealistic expectations.
Bottom Line: People are forgetting the longer in “higher for longer.” Our expectation, based on the Fed’s minutes, is that rate cuts in the U.S. are unlikely until late Q2 or Q3.
Consumers
Can the consumer stay strong in 2024? We’re definitely seeing the consumer weakening, but that doesn’t mean they’re weak. Given their relative resilience, we can expect them to continue to spend, though they are likely to be more selective about what they’re buying. It’s important to keep in mind that 60% of consumer spending comes from the bottom 80% of income earners. These households have already diminished much of their savings, meaning that going forward, the economy must lean on higher income earners and/or lower income earners borrowing more, which they’re already doing. Our expectation is that overall, consumers will hold up reasonably well in 2024, but it will be a somewhat different story than last year. In 2023, consumers were expected to be weak but demonstrated great resilience. This year, the bar has been re-set higher, and they could be a bit weaker than expected.
Bottom Line: The consumer is likely to be less relevant in driving the economy in 2024, as we expect them to be somewhat weaker than they were last year.
2024 Outlook
On Wednesday, January 24, we’ll be releasing a special report and video featuring our outlook for 2024. It will include a recap of where markets are heading, risks and opportunities, as well as our team’s bullish or bearish ratings on bonds, dividends, and four specific sectors: Financials, Real Estate, Health Care, and Technology. Stay tuned to this space for more details on how you can access it.
Footnotes
1David French, “S&P, Nasdaq extend year-start skid to three; Dow higher on financials,” Reuters, January 4, 2024.↩
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.
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A New Year’s Hangover for Markets
January 8 to 12, 2024
A New Year’s Hangover for Markets
January 8 to 12, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Stock Markets
Bottom Line: While markets are likely to be more volatile in 2024, the slow start to the year may simply be people taking off some profits after a strong end to 2023.
Interest Rates
Turning to bonds: rate cuts are still the expectation, which would signal a better environment for bonds in 2024, though the magnitude of those cuts remains in question. The recently-released minutes from the Fed’s last meeting seemingly confirmed this rosier outlook, revealing that internally, they aren’t expecting any more rate hikes. The timing of cuts is still the big question. The Fed minutes would seem to indicate that three rate decreases are planned for 2024. Markets, however, are pricing in even more cuts and are expecting at least one decrease as early as March. We think it’s unlikely that the Fed eases rates in Q1, and if we see a cut in Q2, it’s likely to be later in the quarter. The Bank of Canada (BoC) may decrease rates sooner, but the Canadian economy and consumer are weaker than their American counterparts, so it’s not an apples-to-apples comparison. Central banks’ cadence is supposed to be: 1) higher rates; 2) a pause; and 3) rate cuts. Too many investors seem to be skipping the pause and going directly to the rate cut story, which is creating unrealistic expectations.
Bottom Line: People are forgetting the longer in “higher for longer.” Our expectation, based on the Fed’s minutes, is that rate cuts in the U.S. are unlikely until late Q2 or Q3.
Consumers
Can the consumer stay strong in 2024? We’re definitely seeing the consumer weakening, but that doesn’t mean they’re weak. Given their relative resilience, we can expect them to continue to spend, though they are likely to be more selective about what they’re buying. It’s important to keep in mind that 60% of consumer spending comes from the bottom 80% of income earners. These households have already diminished much of their savings, meaning that going forward, the economy must lean on higher income earners and/or lower income earners borrowing more, which they’re already doing. Our expectation is that overall, consumers will hold up reasonably well in 2024, but it will be a somewhat different story than last year. In 2023, consumers were expected to be weak but demonstrated great resilience. This year, the bar has been re-set higher, and they could be a bit weaker than expected.
Bottom Line: The consumer is likely to be less relevant in driving the economy in 2024, as we expect them to be somewhat weaker than they were last year.
2024 Outlook
On Wednesday, January 24, we’ll be releasing a special report and video featuring our outlook for 2024. It will include a recap of where markets are heading, risks and opportunities, as well as our team’s bullish or bearish ratings on bonds, dividends, and four specific sectors: Financials, Real Estate, Health Care, and Technology. Stay tuned to this space for more details on how you can access it.
Footnotes
1David French, “S&P, Nasdaq extend year-start skid to three; Dow higher on financials,” Reuters, January 4, 2024.↩
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.
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