What an early election could mean for Canadian investors

Market Recap

• It has been well documented that September is traditionally the worst month of the year for equities.¹

• While we’re still in the early days, this September looks no different, with stocks seeing their biggest weekly selloff since March 2023.

• The S&P 500 ended 4.2% lower, the Nasdaq slumped 5.8%, while the Dow dropped 2.9% after August’s jobs report reignited fears that the economy is cooling faster than anticipated, leaving the Fed behind the curve.

Canada

Last Wednesday, as expected, the Bank of Canada (BoC) lowered its key interest rate by 25 basis points. But perhaps unexpectedly, later that same day the New Democratic Party (NDP) pulled out of their supply-and-confidence deal with the governing Liberals, potentially setting the stage for an early federal election. What are the potential impacts of these developments for Canadian investors? To start with the BoC: as mentioned, this move came as no surprise. We had expected the tone of comments from the Bank to be supportive of continuing rate cuts as long as inflation continues to behave, and that’s largely what they were. Our one key takeaway from the remarks is that a 50-bps decrease is not out of the question at some point if the economy weakens faster than expected. The Bank alluded to the fact that we’re seeing a slowdown in growth as well as unemployment numbers creeping up. In our view, that means it’s likely the BoC will continue to be aggressive on rate cuts. For now, we continue to be slightly underweight Canada for all of the reasons that are prompting the BoC to cut rates in the first place. But there will be a point when the economy stabilizes and it’ll be time to rotate back. On the political front, the NDP’s move is likely driven by a desire to separate themselves from the Liberals, who have been struggling in the polls for some time.² This will make it more difficult for the Trudeau government to pass their policy objectives for the remainder of this session. Overall, we view this as a symptom of the electorate’s lack of confidence in the Liberals and the Conservatives’ growing momentum. As I’ve mentioned previously in this space, elections often cause short-term uncertainty, but rarely do they have significant longer-term ramifications. We think that’s the most likely outcome if we do see an early federal election.

Bottom Line: We expect the BoC to continue to be aggressive on rate cuts, and while an election this year could cause some short-term uncertainty, we wouldn’t expect it be a longer-term game-changer for markets.

Nvidia

Last Tuesday, in the wake of Nvidia’s modest earnings beat (which followed several straight quarters of astonishing outperformance), the company suffered the biggest single-day drop in market value ever for a U.S. company.³ This prompted anxiety-stoking headlines like this one from CNN: “Nvidia is suddenly in trouble.” But beyond the steep one-day decline, are concerns about Nvidia and the artificial intelligence (A.I.) theme warranted? In our view, the A.I. theme will still be prevalent for the longer term. Going forward, virtually every company will be using A.I. in some shape or form, especially as a means of maximizing efficiency—doing the things that people either can’t do or that are too time-consuming to be profitable. Those plusses will continue to play out over the course of years. Consider the internet boom as a comparison: the hype stage in the late 1990s featured lots of investment, but at a certain point, those stocks largely fell of a cliff. It wasn’t until a decade later that a handful of them bounced back and became the giants that dominate today’s market. We wouldn’t expect the A.I. cycle to play out that slowly and turbulently—innovation moves much more quickly now—but fast-movers like Nvidia can’t reasonably be expected to grow in a straight line. Right now, A.I. companies’ revenue doesn’t necessarily match up with expenses, and valuations are expensive at a time the economy is gradually weakening. It’s not surprising that some investors would opt to take some profits. Nvidia hasn’t dropped to the point where we’d say it’s time to load up, but investors that haven’t owned it might view these dips as opportunities to initiate or add to their A.I. position.

Bottom Line: Given the rapid growth of Nvidia and A.I. in general, turbulence is to be expected and isn’t necessarily a signal of a longer-lasting let-down in the A.I. story.

China

The latest news out of China is that Beijing is considering lowering interest rates to provide relief for mortgage holders and prop up the country’s property market, which has been a drag on the broader Chinese economy for months. This represents an acknowledgment of what many observers have been saying for some time: the Chinese economy is at a relative standstill compared to the world economy, and some form of additional stimulus is necessary to get it moving again. Other measures may also be in consideration, including converting unoccupied buildings into low-cost housing for individuals, which would require the support of local governments. This could help reduce the outstanding supply and help property developers improve their balance sheets. The hope is that they’ve reached an inflation point and the worst is behind them. That said, there are years’ worth of already-built housing inventory available, and that backlog will take a while to clear even if activity returns to the market. Any steps that Beijing takes now are unlikely to solve the problem overnight, though they may help. In the longer run, consumer confidence will need to return, and people will have to get back to spending in order for the Chinese economy to fully bounce back. So far, China’s response post-COVID has been quite the opposite of North America’s response, where there was a big surge in spending based on pent-up demand and untapped savings.

Bottom Line: The property sector remains a near-term headwind for the Chinese economy, and it is likely to continue to be until the government figures out how to bolster consumer confidence.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Only fools rush in (or out): Caution calls for a rotation, not exit.