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.
The viewpoints expressed by the author 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.
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. 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.
This article may contain links to other sites that BMO Global Asset Management does not own or operate. Also, links to sites that BMO Global Asset Management owns or operates may be featured on third party websites on which we advertise, or in instances that we have not endorsed. Links to other websites or references to products, services or publications other than those of BMO Global Asset Management on this article do not imply the endorsement or approval of such websites, products, services or publication by BMO Global Asset Management. We do not manage, and we are not responsible for, the digital marketing and cookie practices of third parties. The linked websites have separate and independent privacy statements, notices and terms of use, which we recommend you read carefully.
Any content from or links to a third-party website are not reviewed or endorsed by us. You use any external websites or third-party content at your own risk. Accordingly, we disclaim any responsibility for them.
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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What can politics do to your portfolio?
July 8 to 12, 2024
What can politics do to your portfolio?
July 8 to 12, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
The Fed
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.
Footnotes
1 “Minutes of the Federal Open Market Committee,” Federal Reserve, June 11-12, 2024.↩
Disclaimers
The viewpoints expressed by the author 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.
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. 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.
This article may contain links to other sites that BMO Global Asset Management does not own or operate. Also, links to sites that BMO Global Asset Management owns or operates may be featured on third party websites on which we advertise, or in instances that we have not endorsed. Links to other websites or references to products, services or publications other than those of BMO Global Asset Management on this article do not imply the endorsement or approval of such websites, products, services or publication by BMO Global Asset Management. We do not manage, and we are not responsible for, the digital marketing and cookie practices of third parties. The linked websites have separate and independent privacy statements, notices and terms of use, which we recommend you read carefully.
Any content from or links to a third-party website are not reviewed or endorsed by us. You use any external websites or third-party content at your own risk. Accordingly, we disclaim any responsibility for them.
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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