THIS WEEK WITH SADIQ

What can politics do to your portfolio?

July 8 to 12, 2024

THIS WEEK WITH SADIQ

What can politics do to your portfolio?

July 8 to 12, 2024

Commentary

Market Recap

  • Equity markets rose modestly this week alongside some softer economic data and shortened holiday trading.
  • The S&P 500 rose 2%, with tech and communication services leading. The index pushed above 5,500 for the first time and finished the week at a record high.
  • Meantime, the TSX added 0.8%, with materials leading.

The Fed

Last week, the minutes from the U.S. Federal Reserve’s (Fed) June meeting were released, and they included committee members’ reaction to a drop in the Personal Consumption Expenditures (PCE) price index, which the Fed uses to measure inflation. According to the minutes, the Fed “judged that although inflation remained elevated, there had been modest further progress toward the 2 percent goal in recent months.”1This language caught observers by surprise, as it strikes a more dovish tone than what they’ve said previously. Needless to say, that’s a positive sign for investors. What remains unclear is whether there was enough movement in the data to accelerate the Fed’s rate easing schedule. Inflation numbers have certainly improved. Job openings have also diminished and unemployment claims are starting to creep higher. But if you were hawkish before, we’re not sure there’s enough there to change your opinion. The data and language of the minutes indicate that the likelihood for a rate cut in July has probably increased, but we still think it’s unlikely. In our view, September is the most likely month for rate cuts to commence.

Bottom Line: We’ll be surprised if the Fed cuts interest rates in July, but the minutes from June confirm that we’re likely to get at least one rate cut sometime this year.

Election volatility

With the U.S. presidential election in flux following the first debate and elections in France and the U.K. reshaping European politics, how is election-related volatility likely to play out in the coming months? We view it as an important factor for markets, but not necessarily for the long term. Presidents and prime ministers do not shape policy on their own—they generally need to work with the legislature (be it parliament or congress) in order to pass their proposals, and the composition of that legislature determines the ease with which they’re able to get their agenda enacted. In the United States, election years tend to be good for markets as incumbents use whatever levers are at their disposal to increase their winning chances. Looking ahead, we see geopolitical tension—in the form of war or trade disputes—as a legitimate risk for U.S. markets. Changes to immigration policies under a potential Trump administration could also impact growth, as could new tariffs if they were to be enacted. Domestically, the market could continue to be bullish under a Trump presidency, but the geopolitical risk factors could rise. Across the pond, results of the second round of voting in France are still being tabulated at the time of this writing. The U.K. general election is in the books, however, as Labour swept to a resounding victory. Given the political uncertainty we’ve seen in the U.K. recently—five Prime Ministers in the last five years—we think this election could yield greater stability. That would be positive for economic growth, though the country also needs some rate cuts given the relatively weak state of the consumer.

Bottom Line: We don’t expect election volatility to be a significant long-term concern for markets, though depending on election outcomes, geopolitical tension could rise.

Factor rotation

Are markets due for a factor rotation? We think so. In fact, we’ve already implemented something of a rotation, moving our Value position to slightly overweight (+1). That said, we don’t expect the top tier names to fall out of favour. The Nvidias of the world still look attractive; it’s the second tier of Growth names that could be impacted by a rotation to Value. The artificial intelligence (AI) story is likely to continue in the near term regardless of the state of the consumer, because it’s big corporations that are investing in it. The middle part of that growth cycle, when consumers begin to play a greater role in revenues, is where things could change, but we’re not there just yet. With rate cuts on the horizon, Financials are poised to do better, assuming loan loss provisions don’t increase much further. Overall, we anticipate movement to areas with lower price-to-earnings (P/E) multiples, as investors pare back their exposure to non-leading areas of Growth and rotate to sectors that could provide some downside protection in the case of a slowing economy. A similar rotation could happen from U.S. equities into other markets, though we wouldn’t expect it while the key mega cap companies continue to dominate.

Bottom Line: A rotation into areas with lower P/E multiples is likely, but it won’t mean that we’ll be moving completely out of Growth and completely into Value.

Positioning

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Shifting to Neutral: The Case for Optimistic Caution.

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.


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Insights

House view
July 17, 2024

Politics and profits: Finding wins in an election year

The bad news is that the economic environment is worse than it was one year ago. The good news is that it is still in a pretty strong position and we’re not seeing any signs in the marketplace worrisome enough to warrant taking significant risk off the table.
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July 15, 2024

Is it time to swap Big Tech for Small Caps?

Should investors consider rotating into equities with smaller market capitalizations? What did the latest CPI report tell us about the odds of a September rate cut? And where along the yield curve should investors look for opportunities?
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BMO ETF Portfolios’ July commentary: “Take the Money and Run, or Take it Easy?”

With the end of the month, quarter and first half of 2024 in the books, markets seem to be taking a collective deep breath in anticipation of what the remainder of the year will bring.
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Commentary
July 2, 2024

Why American consumers are holding on—and Canadians aren’t

What is the state of the consumer as we enter the second half of the year? What impact did last week’s U.S. presidential debate have on markets?
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Chairman Powell: The Ultimate Bond Villain?

What’s causing the gap between Canadian and U.S. equities? What is the source of recent bond volatility, and will it persist for the rest of 2024?
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House view
June 21, 2024

Shifting to Neutral: The Case for Optimistic Caution

In early June, the Bank of Canada (BoC) became the first of the world’s major central banks to lower interest rates, cutting by 25 basis points. a day before the European Central Bank (ECB) made the same move. But in the United States, it is a different story.

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