May 2024 Commentary

BMO ETF Portfolios’ May commentary: “Jerome and the very topsy, turvy market”

May 16, 2024

May 2024 Commentary

BMO ETF Portfolios’ May commentary: “Jerome and the very topsy, turvy market”

May 16, 2024


Portfolio Activity

  • As we were already well diversified in the portfolios, we made very few changes in the allocation tilts in the past month, remaining overweight equities, with associated downside protection in the form of put options on the S&P500 Index, which provided a relative buffer to the full impact of the market pullback. We are holding this protection headed into the June U.S. Federal Reserve Board meeting, as markets continue to be hypersensitive to any potential shifts in the trajectory for policy rates.
  • Chinese equities have continued to grind higher, helping Emerging Markets equities lead in April, while Canadian and EAFE equities also outperformed the U.S., as the rotation away from technology and “Magnificent 7” [a group of high-performing U.S. stocks including Microsoft (MSFT), Amazon (AMZN), Meta (META), Apple (AAPL), Google parent Alphabet (GOOGL), Nvidia (NVDA), and Tesla (TSLA)] names favoured less expensive markets and sectors. There has been a relief rally on oversold conditions in the first week of May, but our belief is that this rotation will continue to be a longer-term theme throughout 2024.
  • Our addition to Healthcare last month was unfortunately coincident with some company-specific events that significantly impacted first quarter earnings reporting for the sector, with the detraction of Bristol Myers overshadowing the favourable upside surprises across the rest of the sector. However, consensus estimates for earnings-per-share growth in the sector is more than double that of the S&P500 Index for the next three quarters, driven primarily by continued revenue expansion, continuing the pattern of market-leading upside surprises seen in the first quarter.

“Jerome and the very topsy, turvy market”

Once upon a time, in a strange forest of curious creatures, there was a man named Jerome, who called a meeting…

Jerome: “The economy’s growth was far lower than expected, and fewer people got hired last month”.

Investors: “YAAAAYYYYY!”

Jerome: “No, wait….”

OK, perhaps a bit simplistic, but following a stormy April, markets returned to the “bad news is good news dynamic”, following the U.S. Federal Reserve Board’s decision to hold rates, coupled with sufficiently dovish commentary to at least take rate hikes off the table, ending a relatively modest pullback in equities.

First quarter 2024 (the “quarter”) earnings season, while mostly surprising to the upside on consensus earnings-per-share estimates, has been less convincing on the top line, with revenue beats coming in below historical average.  Disappointments from bellwether stocks like Tesla Inc., and Meta were a large part of the broader market sell off in April, before recovering in the face of cooler economic data.  U.S. jobs numbers came in far below expectations.  The heavy lifting was borne mostly by the Health and Education sectors, with a notable uptick in Trade, Transportation and Utilities roles.  White collar positions in Information Technology and Business Services posted net losses.  This resulted in a 10 basis point (bp) increase in unemployment to 3.9%, while further tempering of growth was seen in hourly wages, which rose 0.2% versus the 0.3%.

The downside surprise in GDP growth this quarter was also a key shift, at only 1.6% year over year versus the consensus call for 2.5%, although a look beneath the surface showed this largely to be a function of inventories and net exports, with PPI U.S. Final Demand remaining quite strong at 2.1%.

All told the S&P500 Index saw a 5.5% pullback from this year’s peak in March before inflecting back upward, leaving the market only 1.3% shy of recovering (at time of writing).  Bonds were even more dramatic in their volatility (the measure of how much the price of a security, derivative, or index fluctuates), with the benchmark U.S. 10-year Treasury yield surging roughly 50 bps to close at 4.72%, before coming back in below 4.50% in early May.  The question now is whether that was the first crack in the bull market’s armor, or merely an ordinary corrective event that should be viewed as an opportunity to buy equities rather than sell?

Our collective bias still favours equities over fixed income, albeit with a healthy dose of cautious diversification and risk management overlay, (ie, option strategies).  While economic trends, corporate fundamentals and even policy seem to be broadly positive, there is no denying a heightened sensitivity among investors to any potential change, particularly the trajectory of central banks’ monetary policy decisions.  Couple that with the seasonal effects of summer, when lower volumes can lead to oversized market moves, and what is sure to be an “entertaining” U.S. presidential election season, it just makes sense not to take oversized bets in any one area of a portfolio.

Indeed, the broadening of markets year-to-date (YTD) allows for a certain degree of comfort, as flows to other regions, namely Europe and Japan, and more recently, even China have taken some of the concentration edge off U.S.-dominated global returns.  Similar broadening at the sector level has helped our exposures to Industrials and Financials YTD, while the Materials and Energy sectors have boosted Canadian equity returns to the point of matching that of the equal-weighted S&P500 Index.  Gold has taken a bit of a breather following it’s parabolic YTD returns, but we remain long-term holders, managing shorter term risk with an option spread to generate yield while purchasing downside insurance.


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