Equity markets were mixed this week alongside a heavy dose of economic data and Federal Reserve commentary. The S&P 500 dipped 1.0%, with health care, consumer staples and banks posting the deepest declines, while energy and telecom outperformed.
Indeed, it was a strong week for resource stocks with oil and gold prices now making big runs. WTI oil prices pushed above $86, now up more than 20% since the start of the year, while gold has rallied 13%.
This is, of course, music to the ears of the TSX which outperformed this week, up 0.4%. Materials and energy posted strong gains of 5.4% and 3.3%, respectively.
The Fed
Last week, U.S. Federal Reserve Chairman Jerome Powell delivered remarks at Stanford University’s Business, Government and Society Forum. While Powell did not provide any concrete answers on the timing of expected interest rate cuts, the speech did continue to give people hope that rate cuts are coming. Importantly, the comments were consistent with the central bank’s previous statements about inflation: it’s come down from worrisome highs, but it hasn’t yet reached the Fed’s target, which means that they aren’t quite ready to pull the trigger on rate cuts just yet. That reminder—that cuts are likely coming, just not necessarily immediately—should cause increased volatility. In our view, Powell may be gently guiding the market toward a two-cut scenario rather than the previously-expected three before year’s end. He can’t say that explicitly, however, because the Fed is waiting to see how the inflation numbers will play out.
Bottom Line: The overriding theme of Powell’s speech was that rate hikes are done and rate cuts are being seriously considered—it’s just a matter of inflation getting down into the Fed’s comfort zone.
Stocks & Bonds
What impact are Powell’s comments having on stock and bond markets? Equity markets, for their part, had typically ignored the Fed this year—they believed that rate cuts were coming and that they would effectively lower the expensiveness of stocks. However, the potential loss of a third rate cute in 2024 is meaningful to investors and has resulted in a small uptick in market volatility. Until rate cuts come to fruition, it’s hard to see equity markets moving much higher (given the already strong run-up) unless there is another catalyst like better-than-expected earnings. On the bond side, our takeaway from Powell’s remarks is that fixed income markets are likely to lag behind cash until they get a stronger signal that rate cuts are imminent. The spreads on High Yield bonds had narrowed a fair bit over the year and look expensive, especially as small cracks start to form in the economy. So far, with the economy having held up well, lower credit bonds have outperformed higher credit bonds. But going forward, with inflation coming under control and the economy entering a slow softening mode, we prefer to be a bit more quality-focused
Bottom Line: Both equity and bond markets appear to be in a temporary holding pattern as they wait for a sure sign that rate cuts are coming.
Gold
Gold prices picked up slightly in the wake of Powell’s speech, which may seem counter-intuitive if you interpret the comments as a generally good sign for equities over the year, as we do. It does fit a pattern we’ve noticed recently, however, which is that gold isn’t behaving exactly like it has in the past. For instance, gold typically would have been expected to weaken when the U.S. dollar strengthened, but that didn’t happen—it actually hit all-time highs. In our view, the explanation is that the supply-demand dynamics are becoming more fragmented. Some investors are holding gold as a reserve currency because they’ve seen central banks around the world increase their exposure to it. Others are holding it as an inflation hedge. And finally, some are holding it as a safe haven asset in case the economy weakens and volatility increases. These factors help to explain gold’s continuing momentum even after Powell’s remarks.
Bottom Line: Gold isn’t behaving as we might expect it to, as investors continue to hold it for various reasons and in spite of Powell’s recent comments.
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The view from 10,000 feet is that the economy is still in fairly good shape. That said, it is important to understand that we are beginning to see more signs of underlying economic weakness.
Given recent inflation numbers, are markets resetting rate cut expectations, and is a soft landing is still possible? How will the state of the consumer impact earnings season?
How will supply chain disruptions caused by the Baltimore bridge collapse and conflict in the Middle East impact inflation? Do continuing problems in China’s property sector affect the country’s long-term growth outlook?
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Total Eclipse of the Fed
April 8 to 12, 2024
Total Eclipse of the Fed
April 8 to 12, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
The Fed
Bottom Line: The overriding theme of Powell’s speech was that rate hikes are done and rate cuts are being seriously considered—it’s just a matter of inflation getting down into the Fed’s comfort zone.
Stocks & Bonds
Bottom Line: Both equity and bond markets appear to be in a temporary holding pattern as they wait for a sure sign that rate cuts are coming.
Gold
Bottom Line: Gold isn’t behaving as we might expect it to, as investors continue to hold it for various reasons and in spite of Powell’s recent comments.
Positioning
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled The Bulls Keep Running: Why Markets Remain Upbeat.
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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