We have maintained our positioning this month, with the only change to our house view being a pullback in our gold outlook, from a +2 to a +1. Having recently added to the position, we have bought protective puts to protect against any price consolidation from the current overbought conditions. We are cognizant of the fact that retail investors seem to be missing out on the longer-term rally, with industry purchases of Gold ETFs having decoupled from the gains seen year-to-date in the underlying commodity.
We have had the portfolios essentially neutral equities, with the additional protection of put options, with tilts to U.S. Banks, U.S. Industrials and Global Healthcare. All of these have contributed to returns on a relative basis over the past month.
“Back to Schooled”
September markets started with much the same sentiment as the average 5th grader after the Labour Day long weekend; namely, grumpy, tired and unimpressed. Following the release of August employment data, which again missed consensus expectations, paired with weakening manufacturing activity data, equities have once again turned downward. What is notable is the rotation in sector leadership, where cyclically defensive sectors have started to outperform, broadly due to their higher rate sensitivity in the face of a widely anticipated first cut from the U.S. Federal Reserve.
Pricing of the first cut has moved between 25 and 50 basis points (bps) on almost a weekly basis, with the August consumer price index (CPI) report coming slightly higher than expected, moving the needle back toward 25 bps. Bond markets remain unconvinced; the real U.S. Federal Reserve (“Fed”) policy rate is now tracking well above 2%, a historically high level over the past decade, suggesting that moving policy back to neutral, let alone stimulative in the face of recession fears, is a long slog at 25 bps per meeting. The 2-year yield is similarly oppositional, with the gap between it and the Fed rate wider than it has been since February 2008, right in the muck of the Global Financial Crisis…that’s roughly three and a half standard deviations below the average over that period. Essentially, this is the bond market saying that the Fed will have to pull up its socks and pick up the pace on rate cuts. The U.S. 10 year has also moved south of 3.75%, a key support level, opening the pathway to 3.25-3.3%, again suggesting bonds have more room to run. This is consistent with our current house view, that has us underweight cash in favour of fixed income.
Among equities, the current drawdown has not been as sharp as that in August, but the notable shift in leadership since August 1 is clear; Real Estate, Consumer Staples, HealthCare and Utilities are all outperforming the S&P 500 Index since then, while InfoTech and Energy have lagged (on a price-only return basis). The much-anticipated release of Nvidia’s second quarter earnings, which again beat expectations (although disappointed with cautions surrounding timing of their Blackwell chip’s release), were still not sufficient to ward off an 18% drawdown of the Tech behemoth’s share price in 6 short days. Banks and Industrials have held up reasonably well, despite their more cyclical inclinations, but the overriding message is that there seems to be a narrative shift in the market, with more defensive positioning, and a broadening of sector participation.
Of course, we can’t forget the U.S. Presidential Election, with the first and perhaps only candidate debate just concluded. To skip the politics and focus on market impact, in short: the debate had marginal impact on election probabilities, and certainly nothing sufficient to make a sweep for either party a base case. History shows that elections are typically non-events for the broader market, with sector implications at best, but it is fair to say that the politics of 2024 are far different today than the past. For now, we are watching and waiting, focusing on Fed Policy, economic data and market fundamentals more than partisan policy.
Disclaimers:
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. 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.
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. Particular investments and/or trading strategies 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.
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.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
Looking past the Mag 7: Why Mid- and Small-Caps could outperform going forward
Given current valuations, those who choose to increase allocations to small and mid-caps at this point in the monetary policy cycle may expect to be rewarded.
What does Saudi Arabia’s increased oil production mean for crude prices and inflation? How is the market responding to China’s recent stimulus package, or U.S. consumer confidence data?
What are the key takeaways from the Fed’s 50-bps rate cut and Chairman Jerome Powell’s remarks? Why did the yield on 10-year Treasuries rise rather than fall after the Fed’s announcement, and what is the outlook for bonds?
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BMO ETF Portfolios’ September commentary: “Back to Schooled”
BMO ETF Portfolios’ September commentary: “Back to Schooled”
Steven Shepherd, CFA
Portfolio Activity
“Back to Schooled”
September markets started with much the same sentiment as the average 5th grader after the Labour Day long weekend; namely, grumpy, tired and unimpressed. Following the release of August employment data, which again missed consensus expectations, paired with weakening manufacturing activity data, equities have once again turned downward. What is notable is the rotation in sector leadership, where cyclically defensive sectors have started to outperform, broadly due to their higher rate sensitivity in the face of a widely anticipated first cut from the U.S. Federal Reserve.
Pricing of the first cut has moved between 25 and 50 basis points (bps) on almost a weekly basis, with the August consumer price index (CPI) report coming slightly higher than expected, moving the needle back toward 25 bps. Bond markets remain unconvinced; the real U.S. Federal Reserve (“Fed”) policy rate is now tracking well above 2%, a historically high level over the past decade, suggesting that moving policy back to neutral, let alone stimulative in the face of recession fears, is a long slog at 25 bps per meeting. The 2-year yield is similarly oppositional, with the gap between it and the Fed rate wider than it has been since February 2008, right in the muck of the Global Financial Crisis…that’s roughly three and a half standard deviations below the average over that period. Essentially, this is the bond market saying that the Fed will have to pull up its socks and pick up the pace on rate cuts. The U.S. 10 year has also moved south of 3.75%, a key support level, opening the pathway to 3.25-3.3%, again suggesting bonds have more room to run. This is consistent with our current house view, that has us underweight cash in favour of fixed income.
Among equities, the current drawdown has not been as sharp as that in August, but the notable shift in leadership since August 1 is clear; Real Estate, Consumer Staples, HealthCare and Utilities are all outperforming the S&P 500 Index since then, while InfoTech and Energy have lagged (on a price-only return basis). The much-anticipated release of Nvidia’s second quarter earnings, which again beat expectations (although disappointed with cautions surrounding timing of their Blackwell chip’s release), were still not sufficient to ward off an 18% drawdown of the Tech behemoth’s share price in 6 short days. Banks and Industrials have held up reasonably well, despite their more cyclical inclinations, but the overriding message is that there seems to be a narrative shift in the market, with more defensive positioning, and a broadening of sector participation.
Of course, we can’t forget the U.S. Presidential Election, with the first and perhaps only candidate debate just concluded. To skip the politics and focus on market impact, in short: the debate had marginal impact on election probabilities, and certainly nothing sufficient to make a sweep for either party a base case. History shows that elections are typically non-events for the broader market, with sector implications at best, but it is fair to say that the politics of 2024 are far different today than the past. For now, we are watching and waiting, focusing on Fed Policy, economic data and market fundamentals more than partisan policy.
Disclaimers:
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. 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.
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. Particular investments and/or trading strategies 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.
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.
BMO Global Asset Management is a brand name under which BMO Asset Management Inc. and BMO Investments Inc. operate.
“BMO (M-bar roundel symbol)” is a registered trademark of Bank of Montreal, used under licence.
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