The unbreakable economy stands firm

Market recap

• Equity markets scratched out modest gains this week, with early geopolitical-related weakness offset by a strong U.S. payrolls report.

• The S&P 500 rose 0.2%, with energy leading the pack, while consumer discretionary and staples lagged.

• The TSX added 0.9%, with strength in energy pulling more weight north of the border.

Payroll data

At the end of last week, U.S. payroll data showed the economy added 254,000 jobs in September.¹ Numbers in the previous two months were simultaneously revised upward, underscoring the robust job market and bruising recession bears everywhere. Annual wage growth also increased 4% year-over-year. With the jobless rate actually declining to 4.1%, it may no longer be sufficient to merely refer to the economy as “resilient”—in fact, don’t be surprised to start hearing descriptors like “strong” and “no-landing” (a scenario in which the economy continues to grow while unemployment remains low) re-enter the macro coverage. The only downside is that a bullish economy gives the U.S. Federal Reserve ample reason to slow and perhaps even pause rate cutting. Should the employment trends continue, we may need to price out several rate cuts through 2025, not out of fear of inflation but because the economy seems to be functioning well without monetary stimulus. The fact is we may be stuck in a long cycle. As a comparison, a delay now would be similar to what we saw in Q1, when the expectation for many cuts was revised down based on equities continuing to be positive.

Bottom line: While the macro backdrop looks good and will provide a nice tailwind for equities, the timeline for rate cuts might suffer as a consequence.

Corporate profits

With earnings season about to kick off, we typically turn our focus to the banking sector for a preview of broad economic health. Financials are inherently linked to the strength of consumers and businesses, which is why credit metrics will be high on our list of things to watch. The fact is we’re still in a fully functioning job market and demand should be sufficient for banks to see the positive effects and maintain the pace of growth. We are seeing strain in some parts of the economy though, and lower income households have in general depleted their pandemic savings, but the overall picture is not one of broad deterioration. It is of resilience. We will also look to Consumer Staples companies for a reading on household spending—although we will view those numbers with a grain of salt. Companies like Walmart and Dollar Tree target the same cost-sensitive consumer, meaning we can identify shifts in purchase decisions, yet they execute their businesses so differently that the quarterly results can also be sharply contrasting.

Bottom line: Keep a watch on banks and consumer staples’ quarterly results, which could deliver better insight into the state of the consumers and businesses.

Political risk

Less than a month from the U.S. presidential election, the race remains a close call. One positive element for investors is the down-ballot polling, which shows the odds of a sweep by either party is low. Though counterintuitive, a divided government is thought to be good for stability because it diminishes the likelihood of significant policy change. A massive shift in legislation often equals surprise, which fosters uncertainty from a market perspective. But with neither side likely to control both Congress and the White House, our expectation is for continued gridlock—a stalemate in which neither party is able to easily pass their policy proposals—through 2025. Moreover, much of the uncertainty about the election has already been priced in. The policy biases of each candidate are well understood and it is unlikely that either will surprise investors should they win the election. On the geopolitical side, tensions are running quite high by historical standards. It has been one year since the start of the Gaza-Israel war, and while the conflict has escalated at various times, oil prices have stayed anchored to supply-demand dynamics, occasionally rising but not quite exploding.

Bottom line: Despite hawkish language on both sides, the probability of a full-scale regional conflict which would be punitive on markets remains low.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Riding the tailwinds of September storms.