Equity markets pushed higher again this week, with a clear easing path for many global central banks helping to reinforce a soft landing.
The S&P 500 rose 0.6%, with materials and consumer discretionary leading the pack, while energy lagged alongside sliding oil prices.
WTI oil has now fallen below the $70 mark as a potential market-share skirmish brews, and that’s like doubling down on the good inflation news for the rest of the equity market.
Oil prices
Last week, Saudi Arabia unilaterally announced that it would increase oil production in December, adding downward pressure to already declining crude prices.1 The move had been widely anticipated due to some OPEC+ members being unhappy with current levels of output. However, a consortium like OPEC+ can only function if the players work together—if any member chooses to overproduce at will, the collective pricing power is undermined and the system falls apart. The combined output of all member countries has, for instance, exceeded their set thresholds by more than 600,000 barrels a day. More importantly, the increased supply represents another blow to the “second wave of inflation” fears. We have seen cooling demand across the globe, most notably in China. Now an increase in production from the world’s largest oil exporter—combined with a potential end to Libya’s blockade—could further depress prices at the gas pump, taking the wind out of inflation and giving consumers an extra boost of confidence.
Bottom Line: Declining oil prices could further quell inflation and buoy consumer sentiment for the remainder of 2024.
China’s stimulus
When economic growth falls, as has recently happened in China, the number one priority is to find a floor. The Chinese government is attempting to do this by injecting a stimulus package designed to lower borrowing costs and shore up the struggling housing sector.2 While the running joke among investors is that stimulus has been trickling in for years, the shift in policy means more resources will be deployed to put a bottom on worsening confidence. Will the policies fix any of China’s structural issues? Unfortunately, no. However, our team is debating whether there are short- to medium-term opportunities in favour of EM and China after the recent rounds of stimulus. Longer-term, there are still reasons to be more cautious on China. The country continues to face longer-term challenges, including a balance sheet recession that greatly resembles what the United States went through post-2008. At the time, low interest rates from the U.S. Federal Reserve did little to stimulate consumer demand because the deflation in home prices had caused significant damage to household wealth. The extremely high personal debt levels made it difficult to repair the individuals’ balance sheets. China now finds itself in a similar situation and the monetary easing currently underway does not resolve that issue, nor does it erase the possibility of escalating trade tensions with the United States, which could further weaken overseas demand for Chinese-manufactured goods.
Bottom Line: China’s recent stimulus should be seen as a short-term positive for markets, both domestically and internationally.
Consumer confidence
U.S. consumer confidence dipped again in September, reflecting broad negative sentiment on the demand side of the economy.3 However, unless these numbers move substantially, they should always be taken with a grain of salt. The biggest shift came in 2022 as a reaction to a sudden rise in interest rates—but since then the data has been roughly level, albeit slightly choppy on a month-to-month basis. One of the main causes is the cumulative effect of inflation. Consumers have felt the pain in their grocery bills, mortgage payments and car loans, which has contributed to an overall feeling of gloom. It’s important to remember, however, that we are not witnessing recessionary dynamics. Employment is still fairly strong, and while businesses aren’t looking to hire quite as many people, there’s little evidence of widespread layoffs or that people are afraid of losing their jobs. The same is true for corporate earnings. Profit margins have remained at historically high levels despite the apparent drop in consumer confidence, unlike in 2022, when softer demand forced them to begin cutting expenses.
Bottom Line: Far from being scary, the lackluster consumer confidence is actually part of a normal, healthy economic process.
The viewpoints expressed by the author 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.
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. Particular Investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
This article may contain links to other sites that BMO Global Asset Management does not own or operate. Also, links to sites that BMO Global Asset Management owns or operates may be featured on third party websites on which we advertise, or in instances that we have not endorsed. Links to other websites or references to products, services or publications other than those of BMO Global Asset Management on this article do not imply the endorsement or approval of such websites, products, services or publication by BMO Global Asset Management. We do not manage, and we are not responsible for, the digital marketing and cookie practices of third parties. The linked websites have separate and independent privacy statements, notices and terms of use, which we recommend you read carefully.
Any content from or links to a third-party website are not reviewed or endorsed by us. You use any external websites or third-party content at your own risk. Accordingly, we disclaim any responsibility for them.
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.
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What are the key takeaways from the Fed’s 50-bps rate cut and Chairman Jerome Powell’s remarks? Why did the yield on 10-year Treasuries rise rather than fall after the Fed’s announcement, and what is the outlook for bonds?
There’s no question that a lot of positive news has been priced into the valuations and earnings expectations for some of the top names—but that doesn’t mean investors should head for the hills.
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Debunking the “second wave of inflation” fears
September 30 to October 4, 2024
Debunking the “second wave of inflation” fears
September 30 to October 4, 2024
Frederick Demers, MA
Market recap
Oil prices
Bottom Line: Declining oil prices could further quell inflation and buoy consumer sentiment for the remainder of 2024.
China’s stimulus
Bottom Line: China’s recent stimulus should be seen as a short-term positive for markets, both domestically and internationally.
Consumer confidence
Bottom Line: Far from being scary, the lackluster consumer confidence is actually part of a normal, healthy economic process.
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.
Footnotes
1 The Cheating Game Inside the OPEC+ Oil Cartel, Bloomberg, September 25, 2024. ↩
2 China’s Stimulus Blitz: What We Know So Far and What to Expect, Bloomberg, September 27, 2024. ↩
3 Consumer confidence dips, China stocks soar: Trading takeaways, Yahoo Finance, September 24, 2024. ↩
Disclaimers
The viewpoints expressed by the author 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.
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. Particular Investments and/or trading strategies should be evaluated relative to the individual’s investment objectives and professional advice should be obtained with respect to any circumstance.
This article may contain links to other sites that BMO Global Asset Management does not own or operate. Also, links to sites that BMO Global Asset Management owns or operates may be featured on third party websites on which we advertise, or in instances that we have not endorsed. Links to other websites or references to products, services or publications other than those of BMO Global Asset Management on this article do not imply the endorsement or approval of such websites, products, services or publication by BMO Global Asset Management. We do not manage, and we are not responsible for, the digital marketing and cookie practices of third parties. The linked websites have separate and independent privacy statements, notices and terms of use, which we recommend you read carefully.
Any content from or links to a third-party website are not reviewed or endorsed by us. You use any external websites or third-party content at your own risk. Accordingly, we disclaim any responsibility for them.
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.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
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