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CA-EN Advisors
THIS WEEK WITH SADIQ

Is Crypto Finally Going Mainstream?

January 15 to 19, 2024

THIS WEEK WITH SADIQ

Is Crypto Finally Going Mainstream?

January 15 to 19, 2024

Weekly Commentary

Market Recap

  • Equity markets pushed higher this week as investors continue to zero in on 2024 rates hikes, and despite sticky U.S. inflation results.
  • The S&P 500 gained 1.8%, and is within close striking distance of an all-time high. The Dow continues to bounce around near record levels, while the Nasdaq still has about 7% to climb. The TSX also has some more work to get there, and underperformed with a 0.3% advance this week.
  • Technology, communication services and consumer discretionary led North American markets on the week, which naturally leads to the Canadian market lagging.

Inflation

Last week, Consumer Price Index (CPI) numbers for December came in slightly higher than expected. While this indicates that U.S. inflation is cooling somewhat slower than many investors had hoped, it’s not the kind of spike that would be likely to change central banks’ plans with respect to interest rate cuts. Unsurprisingly, markets hardly reacted to the news; as I mentioned last week in this space, they’ve been overly bullish on the timing and magnitude of rate cuts for some time, and these latest numbers underscore that cuts may not be right around the corner. Remember: the U.S. Federal Reserve (Fed) still hasn’t said that they don’t need more rate hikes—rather, they keep saying that they haven’t ruled out rate hikes. Explicitly stating that rate increases are over and that a pause has begun seems like an interim step that needs to happen before rates are eased, and we wouldn’t be surprised if that kind of statement happens at the Fed’s meeting in March to set up cuts in the second half of the year. The Bank of Canada (BoC), meanwhile, seems to be striking a more hawkish tone than other central banks, so we’d be surprised if we see a rate decrease at their next meeting, which is before the Fed’s next announcement.

Bottom Line: While U.S. inflation remains higher than hoped, interest rate cuts from the Fed and BoC are still likely, though perhaps not until the second half of the year.

Mega-Cap Layoffs

Recently, tech giants including Amazon and Alphabet (Google) have announced new rounds of layoffs. While one might be tempted to view this as a warning sign for the broader economy, we tend to evaluate Technology companies separately from the rest of the market. Tech companies are trying to build the future, and that’s a tough business—sometimes, big bets just don’t pay off. (Who can forget Microsoft’s Zune media player or the Google Glass line of smart glasses?) Apple’s products provide useful examples of the market dynamics at play. The new Apple Vision Pro headset is pricey and the company doesn’t expect many units to be sold; as a result, it’s unlikely to be a major needle-mover for revenue. New models of the iPhone represent incremental improvements, but nothing groundbreaking. Add in China’s slowdown and there are a number of reasons why job cuts might be warranted, but that would be more product-related rather than consumer-oriented. If we begin to see layoffs or other troubling indicators from the retail side, like Walmart and Target, that would grab our attention and be a cause for greater concern. We’ll continue to watch personal savings and credit card spending to gain insight into the strength of the consumer. With excess savings already depleted for the bottom 80% of consumers, much of future spending—which we do expect to continue for now, since habits are difficult to change quickly—is going to be on a plastic card. As eye-popping credit card statements arrive and mortgages renew, that’s when we expect to see something of a shift away from Consumer Discretionary and toward Consumer Staples.

Bottom Line: We view Tech developments somewhat in isolation. Consumer spending is likely to erode throughout the year, but for now, it’s holding up fairly well.

Cryptocurrency

Last week, Bitcoin ETFs received approval from U.S. regulators, prompting many commentators to opine that it represents a turning point for the legitimization of cryptocurrency as an asset class. We concur to a degree—the increased access should give more people access to crypto without a crypto wallet, thereby increasing demand, which could provide greater upside. It is important to note that the Securities and Exchange Commission (SEC) officially stated this is not an endorsement. Bitcoin is still quite volatile as history has shown time and time again—this is not for all investors and the recent approval does not change that. As I mentioned in a recent Canadian Press article: nothing has changed from the reason of why you would want to own it, or why you wouldn’t want it. For now, rather than adding Bitcoin ETFs or other crypto exposures to our portfolios, our preference is to look at other kinds of assets that might benefit off this trend and start there. That said, we’ll continue to monitor the situation in case we do decide to dip our toes into the water down the road.

Bottom Line: This approval does give cryptocurrencies somewhat more legitimacy, and while we wouldn’t rule out a crypto position down the line, right now we’re content with indirect exposure.

2024 Outlook

On Wednesday, January 24, we’ll be releasing a special report and video featuring our outlook for 2024. It will include a recap of where markets are heading, risks and opportunities, as well as our team’s bullish or bearish ratings on bonds, dividends, and four specific sectors: Financials, Real Estate, Health Care, and Technology. Stay tuned to this space for more details on how you can access it.

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.


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