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 that comprises BMO Asset Management Inc. and BMO Investments Inc.
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.
For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the prospectus. BMO ETFs 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.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
Stock Slump, US Dollar, Canadian Housing
September 12 to 16, 2022
Stock Slump, US Dollar, Canadian Housing
September 12 to 16, 2022
Sadiq S. Adatia, FSA, FCIA, CFA
Chief Investment Officer (CIO), BMO Global Asset Management
Market Recap
Stock Slump
Over the past couple of weeks, markets have been re-evaluating the current environment, and we’re seeing some pessimism. The U.S. Federal Reserve has reiterated that it’s going to keep its foot on the gas pedal, taking interest rate hikes further than many investors were expecting. In essence, they’re saying that while inflation may have peaked, it isn’t going away any time soon. That ongoing concern means that the Fed now seems to consider a recession and some labour market weakness to be acceptable outcomes in its effort to cool rising prices. The Bank of Canada has mirrored the Fed’s stance. Last week, it raised interest rates by 75 basis points and emphasized that we still need to keep an eye on inflation—even with the decline we’re seeing in housing prices. In this environment, defensive positioning makes a lot of sense. On the Financials side, higher rates mean that we’ll have to closely examine the shape of the yield curve—if it inverts further, then Financials will lag the broader market. Sectors like Health Care and Energy make more sense, as they can be expected to hold up relatively well in a downturn—with the caveat that a long and painful recession would be bad for oil and gas. But we don’t consider that to be the most likely scenario.
Bottom Line: Stocks have room to decline further, because central banks are more concerned about inflation than protecting markets.
US Dollar
The US dollar has been incredibly strong of late, almost reaching parity with the British Pound Sterling—a possibility that seemed nearly unfathomable in 2021. But what’s behind this dominance? There are a couple of main drivers. One, North American central banks have been faster to raise interest rates that other countries, which means that the U.S. economy is in better shape than many others around the world. And two, we’re still in a risk averse environment. As much as we’ve seen some bear market bounces, markets are still down significantly from the beginning of the year. With the US dollar considered something of a safe haven, it’s not surprising that money is flowing to the greenback in this environment. Looking ahead three-to-six months, we see no reason why this strength won’t continue. That doesn’t necessarily mean that the USD will appreciate more from here. But we also don’t expect it to depreciate against other currencies.
Bottom Line: In the long term, the US dollar will come down, but in the short term, expect continued strength.
Canadian Housing
Given the latest interest rate hike, how much more pain can we expect in the Canadian housing market? It’s a complicated question. By all measures, the Canadian housing market is overvalued, and homes have become increasingly unaffordable because of rising rates. This is especially true in Victoria, Vancouver, and the GTA. But the other important factor is that sales activity has dropped off. This concerning trend may well continue, and with no end in sight to interest rate hikes, our evaluation is that there is room for the situation to get worse. The big question is whether this will mean years of pain or only months. Unfortunately, that answer remains unclear. When the market does get back to fundamentals, continuing immigration will help with demand, and supply will slow down because construction will adjust to the new environment. But construction can’t stop overnight—that kind of shift will likely take a couple of years.
Bottom Line: The Canadian housing market may well go lower before it gets better.
Positioning
In terms of positioning, we’ve been spending a lot of time thinking about short-term rallies, like the one we saw late last week. Is it time to take some more risk off the table? Looking at the current environment, we expect September and October to be a bit more challenging for markets, and we still believe that the earnings picture is not quite as rosy as many investors think. The consumer continues to weaken, the labour market is likely to slow down, and inflation is not likely to come down as quickly as some are expecting. When you put all that together, we think taking off some more risk makes sense, at least for our most conservative portfolios. We’re also trimming our Technology exposure, as we expect that it may come back down due to rising interest rates and potential pressure on the consumer.
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 that comprises BMO Asset Management Inc. and BMO Investments Inc.
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.
For a summary of the risks of an investment in the BMO ETFs, please see the specific risks set out in the prospectus. BMO ETFs 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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