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 under which BMO Asset Management Inc. and BMO Investments Inc. operate.
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.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
Is the Tech Rally Almost Over?
April 10 to 14, 2023
Is the Tech Rally Almost Over?
April 10 to 14, 2023
Steven Shepherd, CFA
Director, Portfolio Manager
Inflation vs. Financial Instability
Instability stemming from the Silicon Valley Bank (SVB) failure has dominated financial news for weeks. But if inflation isn’t already back on the front burner as markets’ top concern, we expect it will be soon—it’s simply the bigger nut to crack. For many investors, as soon as they hear the words “financial crisis,” they think immediately think back to 2008. But the current environment is very different from that downturn for several reasons, one of which being that financial conditions in 2008 were much tighter than they were when the current rate-hiking cycle began. Ultimately, in the here and now, elevated inflation is what still has to be addressed, and the work isn’t done yet. Even though we’re seeing the numbers move in the right direction, they still aren’t where central banks want them to be. Counterintuitively, the financial crisis has helped in some respects—it’s done what the U.S. Federal Reserve hasn’t been able to accomplish, which is to tighten financial conditions, with some estimates of the impact on lending standards to be the effective equivalent of a 50-to-75 bps rate increase. The result has been a repricing of the Fed’s terminal rate, which is now much lower than the 5.75% (or thereabouts) that had been estimated prior to the SVB collapse. In fact, the market is now pricing in rate cuts this year.
Bottom Line: The banking crisis is likely to be a short-term fluctuation, while inflation is the longer-term fight—and despite the progress made, it’s hard to see the economy getting back on track without at least a mild recession.
Tech Rally
Bottom Line: We’d advise caution with respect to the recent tech rally—our inclination is to sell into strength rather than build from here.
Recession
The SVB situation has caused renewed discussion around the likelihood of a recession, but is a ‘soft landing’ still the most likely scenario? For a brief period, a so-called ‘perfect landing’—no recession at all—seemed like a possibility, given the strength of the job market and the consumer. Now, it appears far less likely.. A ‘soft landing’ would mean a relatively benign, shallow, and short-lived recession, but negative growth nonetheless. At present, the headline economic numbers say that everything’s fine—there are lots of jobs available, initial jobless claims are rising but still low, and while we’re seeing second rounds of layoffs in the Technology sector, they haven’t yet broadly impacted the U.S.’s largest employers, like automotive companies or retailers like Costco and Walmart. When those types of companies are cutting jobs, you know the economy is in trouble. While on an absolute basis the numbers aren’t pointing toward a recession, on a relative basis, they are. Outside of employment, disposable income and consumer spending have been the other supports for the U.S. economy, 75% of which is based on consumption. Levels of consumer savings are still higher than they’ve been historically, but they are lower than they were immediately after COVID, when so much money had been flooded into the system. It remains to be seen how long that leg of the table can hold up the rest of the economy.
Bottom Line: Our expectation is for a shallow recession to happen this year, though the banking crisis has raised the tail risk somewhat.
Positioning
Lately, we’ve begun to write some covered calls on our Industrials position, which is intended to take advantage of volatility and what we expect to be a choppy market in the weeks heading into the summer. With Q1 earnings on the horizon, we’re collecting a bit of premium in favour of the upside. We’ve also been reducing our exposure to High Yield bonds, instead pivoting to long federal bonds, which adds duration to our portfolio that will be paid off with lower interest rates. And finally, we’ve been taking profits from our long heldU.S. Energy position in favour of increasing our gold position, which we expect to be driven upward by a weakening U.S. dollar. It’s also reflective of our expectation that when a recession does come, there will probably be a lower demand for U.S. energy. With regard to OPEC’s recent announcement of a cut to production,—most of the countries in OPEC are already producing below their quota, and the organization has a history of not following through on the numbers they announce in the press. Any reduction in supply may prove less than initially feared.
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 under which BMO Asset Management Inc. and BMO Investments Inc. operate.
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.
®/™Registered trademarks/trademark of Bank of Montreal, used under licence.
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