I’d throw dollars out of helicopters if I had to, to stimulate the economy.
Global Markets: Upside despite storming bond yields
Global Equity Factors: Reflation hope giving Value a shot in the arm
Can too Much Bond-Yield Optimism Derail the Equity Rally?
While equity prices were quick to recover from the pandemic lows, North American bond yields only found their V-shaped recovery since last August and mostly surged since late January as improving expectations of economic growth have stoked fears of accelerating inflation. An even more pronounced move has taken place in the slope of the 2-30yr North American yield curves as central banks are not expected to raise their policy rates for a long time while economic activity is expected to run hot into 2022 given the aggressive fiscal stimulus, especially in the U.S.. Unlike cycles where bond yields are pressured higher by hawkish central banks (e.g., 2018), this time around the move in yields is entirely driven by good economic news, which is why we believe the equity rally can endure some upside in interest rates.
Gold: A dimmer outlook but still room to shine
Gold has struggled in the face of rising interest rates and despite of higher inflation fears. While gold can be viewed as an inflation hedge, it is its correlation with real yields that matters more. We have flagged higher real yields as the greatest threat to gold performance given its relatively high correlation since 2018. Negative interest rates sharply reduce the opportunity cost to holding gold, and even though real yields are still negative, reflation hopes are raising concerns that they may soon turn positive. We think these concerns are overdone as the labour market is unlikely to rebound sharply back to pre-COVID-19 levels even with the lifting of mobility restrictions this year. The Fed’s dovish stance—with a QE taper unlikely to be announced until the end of this year– is therefore likely to keep real rates capped in negative territory for now.
Should Investors Fear the Warning of Buffet’s Favourite Stock Market Indicator?
The stock-market-cap-to-GDP ratio, known as the Buffett Indicator, is analogue to the price-to-sales ratio for the entire country. The Buffet Indicator for the U.S. equity market has been steadily rising in the past year as the economy shrank and stock prices surged to record highs. Meanwhile, the ratio for Global or Canadian equities also rose in recent months, but they remain well within their historical norm, suggesting U.S equities are in rich territory vs Canadian or Global equities.
Outlook and Positioning: Staying the course on the recovery
* The performance for (ZLB) for the period ended February 26th, 2021 is (as follows: 3.09% (1 Year); 7.29% (3 year); 7.93% (5 year); and 11.75% since inception (on October 21st, 2011).
**The performance for (ZCN) for the period ended February 26th, 2021 is (as follows: -14.90% (1 Year); 8.77% (3 year); 10.35% (5 year); 5.38% (10 year); and 7.22% since inception (on May 29th, 2009).
*** The performance for (ZEO) for the period ended February 26th, 2021 is (as follows: -2.42% (1 Year); -6.93% (3 year); -4.38% (5 year); -7.79% (10 year); and -5.38% since inception (on October 20th, 2009).
**** The performance for (ZEB) for the period ended February 26th, 2021 is (as follows: 17.73% (1 Year); 6.48% (3 year); 13.09% (5 year); 9.44% (10 year); and 10.52% since inception (on October 20th, 2009).
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.
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.
BMO Global Asset Management is a brand name that comprises BMO Asset Management Inc., BMO Investments Inc., BMO Asset Management Corp., BMO Asset Management Limited and BMO’s specialized investment management firms.
Commissions, management fees and expenses all may be associated with investments in exchange traded funds. Please read the ETF Facts or prospectus before investing. Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.
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.
BMO ETFs are managed by BMO Asset Management Inc., which is an investment fund manager and a portfolio manager, and a separate legal entity from Bank of Montreal.