No data was found
CA-EN Advisors
THIS WEEK WITH SADIQ

The Fed’s Holiday Surprise

December 18 to 22, 2023

THIS WEEK WITH SADIQ

The Fed’s Holiday Surprise

December 18 to 22, 2023

Weekly Commentary

Market Recap

  • Equity markets rallied this week as markets priced in early-and-often rate cuts for 2024.
  • The S&P 500 rose 2.5%, led by banks and cyclicals (materials, industrials and consumer discretionary), while the Dow pushed to a record high.
  • The TSX gained 1.0% with banks jumping almost 4% on the week.

The Fed

Last week, the U.S. Federal Reserve (Fed) released projections indicating that it expects at least three 25-basis-point interest rate cuts by this time next year. Meanwhile, economic data seems to be confirming that inflation is retreating. Needless to say, these are positive developments. It’s important to note, however, that this good news on interest rates is not the result of a badly hurt economy—if that were the case, then our reaction to potential cuts would be much more bearish. The Fed’s statements confirm our long-held belief that the Fed is likely to ease rates in 2024, though we remain reluctant to project cuts in the first half of the year; cuts in the second half are more likely in our view. If that is the case, then markets would be wise to temper their optimism somewhat and price in the chance that rates won’t be lowered as quickly as some are expecting. That being said, this news gives markets a chance to move higher (as we had called in November) as we approach the end of the year and carry forward the recent momentum in both equities and bonds.

Bottom Line: The Fed’s statement regarding likely interest rate cuts in 2024 is good news for markets, though these decreases may not materialize as soon as some investors are hoping.

Gold

Gold has been on a bit of a run lately, with prices topping $2,000 USD per ounce again. With some analysts projecting it to soar past $2,200/oz by the end of 2024, is now the time to be adding gold to portfolios? We wouldn’t go that far. But if you do have a position in gold, we believe it makes sense to hold on to it. As we enter the new year, gold serves as valuable protection against various risks—for instance, if the economy declines more than anticipated, if inflation spikes back up, if interest rates remain higher for longer, or if markets sell off after the strong run we have had. Gold served that defensive purpose well during the market downturn in September and October, and that’s why we continue to have a slight overweight to gold in our portfolios.

Bottom Line: We remain slightly bullish on gold, but view it as more of a defensive play than an offensive one.

Macro Drivers

Which macroeconomic drivers will we be watching most closely in 2024? Number one is the consumer and, by extension, unemployment. Greater consumer debt levels—and the rising cost of servicing that debt—is likely to bring some people back into the work force. But for people who already have a job, we’ll be looking for any significant changes—for instance, whether unemployment increases or holds steady. If more people lose their jobs, then that would be a sign that cracks in the economy are stating to worsen; after all, if you lose your job, you generally don’t spend much at all, whereas if your income isn’t growing but you’re still employed, you’ll continue to spend. In general, we’d like to see the economy avoid greater job losses in 2024. The second thing we’ll be watching is consumer preferences—how quickly are people moving away from high-priced items, and are they trading down to medium-priced goods or lower-priced staples? So far, we’ve seen a minor shift but nothing massive, which tells us that consumer health may continue to be okay. The third driver we’ll be watching is mortgage rates. In both Canada and the U.S., mortgage rates have been high, but we’re starting to see them come off a bit as central banks pivot to likely rate cuts. That should provide some measure of relief for homeowners whose mortgages are coming up for renewal. Finally, we’ll be monitoring the overall health of the economy. If it weakens more than expected and rate cuts are pushed out, that could indicate a real problem. Of course, we can’t forget about geopolitical risks as well, particularly with the U.S. elections coming up in 2024.

Bottom Line: The most important macroeconomic driver we’ll be monitoring in 2024 is the consumer, and we’ll also be keeping an eye on mortgage rates and the economy in general.

Positioning

In terms of positioning, we’re closely monitoring the rebound we’re stating to see in Financials. We’ve been optimistic about banks for some time, and we continue to see potential upside given the Fed’s recent pivot. How we’d like to play that sector will be a big part of our discussions as we enter the new year.

For a detailed look at the forces that may shape markets in 2024, check out the special December issue of the BMO GAM House View Report, titled 10 Big Investment Trends for 2024.

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.

Insights

Sadiq Adatia
Sadiq Adatia
Weekly Commentary
February 26, 2024
February 2024

How Nvidia Became the New Apple

As Nvidia’s stock soars, is it time to take profits or are there further gains to be found? What does the inflation gap between the U.S. and Canada mean for interest rates?
READ MORE
Monthly House View
February 22, 2024

The American Exception: How U.S. Markets Beat the Bears…Again

It was mixed news for markets, but it did provide the one thing we’ve been seeking for months: greater clarity
READ MORE
Steven Shepherd profile photo
Commentary
February 22, 2023

BMO ETF Portfolios’ February Commentary: Rate Cuts See Their Shadow

January’s slow start turned quickly into a continuation of the fourth quarter’s “everything rally” in the U.S., as earnings season delivered above average upside earnings surprises.
READ MORE
Commentary
February 22, 2024
February 2024

Commercial Real Estate Winter 2024 Market Update: Bricks, Clicks and the Pace of Change

Traditionally slow, commercial real estate now adapts faster to changing behaviors.
READ MORE
Weekly Commentary
February 20, 2024
February 2024

What’s Happening with Bonds?

What do higher-than-expected inflation numbers and slipping bond prices mean for the fixed income outlook? Will the A.I. rally continue, or will the optimism run its course?
READ MORE
Weekly Commentary
February 12, 2024
February 2024

Breaking Down China’s Stock Market Troubles

What impact will the recent selloff of Chinese stocks have on the outlook for Emerging Markets? How have labour markets managed to withstand recent layoffs?
READ MORE