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.
This information is for Investment Advisors only. By accepting, you certify that you are an Investment Advisor. If you are NOT an Investment Advisor, please decline and view the content in the Investor or Institutional areas of the site. The website is for informational purposes only and is not intended to provide a complete description of BMO Global Asset Management’s products or services. Past performance is not indicative of future results. It should not be construed as investment advice or relied upon in making an investment decision. The opinions expressed are subject to change without notice. Products and services of BMO Global Asset Management are only offered in jurisdictions where they may be lawfully offered for sale. The information contained in this website does not constitute an offer or solicitation by anyone to buy or sell any investment fund or other product, service or information to anyone in any jurisdiction in which an offer or solicitation is not authorized or cannot be legally made or to any person to whom it is unlawful to make an offer of solicitation. All products and services are subject to the terms of each and every applicable agreement. It is important to note that not all products, services and information are available in all jurisdictions outside Canada.
The Fed’s Holiday Surprise
December 18 to 22, 2023
The Fed’s Holiday Surprise
December 18 to 22, 2023
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
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.
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