Why American consumers are holding on—and Canadians aren’t

Market Recap

• Markets successfully navigated the first half of 2024 despite uncertainty on a number of fronts. The broad macro environment is flashing sturdy but below-potential growth, lingering inflation pressure and central banks that are reluctant to pivot to full-scale easing.

• S. Technology and Communication Services stocks have maintained their momentum and are arguably the strongest asset class through mid-2024. These two sectors are each up nearly 30% in the S&P 500 after posting gains of more than 50% last year.

• Canadian equities haven’t been able to match the firepower of the S&P 500—they just don’t have exposure to what has been working. While there have been some trouble spots—a tough bank earnings season and a bear-market in telecom—the TSX has still managed to scramble to a 4% gain with help from Resources.

Consumers

As we cross the halfway point of the year, what is the state of the consumer? It’s a different story in Canada than it is in the United States. South of the border, the consumer could still be described as resilient, but there are some signs of softening. Spending patterns have changed as some consumers have become more price-sensitive, especially in areas like travel and luxury purchases. But despite that adjustment, they are still spending, which is likely to continue to spur the economy and support earnings growth. In Canada, the consumer slow-down has been more pronounced. In general, Canadians are more highly leveraged than their American counterparts, meaning that higher interest rates—especially in the housing market—will have a greater impact on their pocketbooks. That’s why we’ve seen a greater downturn in the health of the consumer here, and why inflation has declined faster in Canada than it has in the U.S. Looking ahead, the schedule for interest rate cuts will be of great interest to consumers on both sides of the border. If the Bank of Canada (BoC) goes ahead with the expected two-to-three rate cuts in 2024, then that would provide some relief for Canadian consumers. In the U.S., the Federal Reserve (Fed) is unlikely to cut rates more than once this year in our opinion, but the outperformance of U.S. stock markets compared to the Canadian market has given the American consumer a bit of a wealth cushion.

Bottom Line: The U.S. consumer is softening but still relatively resilient, while the Canadian consumer is struggling more with higher interest rates.

Emerging Markets

Late last week, I returned from an information gathering visit to China, not dissimilar to the trip to India I’d taken in January. The timing of these trips is not coincidental, as a potential rotation within Emerging Markets (EM) has been a hot topic among certain investors this year. The recent election in India was a reminder of the country’s relative political stability (despite Prime Minister Narendra Modi’s failure to secure a majority government as most observers had expected). Longer-term, most of the indicators support the view that India is in a strong growth mode: it has the world’s largest population at over 1.4 billion,¹ a young and growing middle class, and it is likely to receive a productivity boost from significant investment in infrastructure. Valuations may represent some risk in the short-term, but we view India as a long-term play. China, for its part, has certainly experienced some near-term headwinds, including a struggling property sector, weaker-than-expected consumer spending, and trade tensions with the U.S. that are unlikely to subside regardless of who wins the presidential election. The different dynamics between India and China tilt us more toward India in the short-term, and we do expect to increase the allocation to India within the EM sleeves of our portfolios sometime in Q3. That said, valuations in China are very attractive at the moment—so attractive, in fact, that our preference is to be underweight the rest of EM (ex-China and India) in order to increase our overweight to India while maintaining our China exposure.

Bottom Line: We are bullish on India’s growth prospects, but that doesn’t mean that we’re down on China over the long term.

U.S. Election

Last week’s U.S. presidential debate seemed to generate greater-than-usual public and media interest. In the lead-up to the debate, Donald Trump’s negative comments about President Biden had lowered the bar for Biden’s performance—despite Trump’s last-minute attempt to cast Biden as a skilled debater. Media consensus seemed to be that Biden nonetheless fell short of Democrats’ hopes, and that Trump had the stronger performance despite numerous false statements. Many reports also highlighted many voters’ dissatisfaction with both candidates, and speculated on the possibility that Biden could be replaced on the Democratic ticket by an alternative candidate like California governor Gavin Newsom. Markets were marginally up early the next morning but ended slightly down—so relatively muted overall. We’ll be watching the polls to see if the debate swayed public opinion in any significant way. For now, however, our takeaway is that despite markets’ fairly calm reaction, the debate could signal the beginning of election-related volatility—especially if a change at the top of the Democratic ticket becomes a real possibility. Regardless, we expect that volatility to continue through November.

Bottom Line: The jury is still out on whether the debate will move the polls, but either way, we expect election-related market volatility to pick up from here.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Shifting to Neutral: The Case for Optimistic Caution.