Equity markets churned out gains this week alongside firm U.S. economic data and rate cuts by the Bank of Canada and ECB.
The S&P 500 rose 1.3%, led by technology and health care, although the Roaring Kitty hoopla sapped most of the attention. The index closed the week just off a record high, along with the Nasdaq, and is now up a cool 12.1% on the year.
The TSX slipped 1.2% on the week, with energy and materials dragging against gains in consumer stocks, technology and telecom.
Interest Rates
Last week, in a much-anticipated decision, the Bank of Canada (BoC) lowered its key interest rate by 25 basis points—a move that was mirrored a day later by the European Central Bank (ECB). Market participants were on the bubble about the BoC’s decision, but as I mentioned in this space last week, we were confident it would happen. Overall, market reaction was relatively muted. The Canadian dollar (CAD) did drop somewhat before bouncing back. Canadian equity markets were also up, but so were U.S. and International exchanges, so the rise likely is not attributed to the rate cut. We anticipate the market’s reaction to get more pronounced as more rate cuts come through—and we do expect more cuts. The CAD is likely to continue to weaken as rates are lowered and the gap with the U.S. Federal Reserve’s (Fed) policy rate widens. On the other hand, rate cuts should be a positive for the Canadian bond market, especially relative to U.S. bonds. Looking ahead, the BoC highlighted that more rate cuts are likely coming, but also emphasized that, like their American counterparts, they’re still data dependent. That gives them an out if they feel they’re getting too far ahead of the Fed, or if an unexpected data point pops up. The ECB took a similar stance in its statement but was less definitive about future cuts. The reality is that in both Canada and Europe, the inflation picture is very different than it was 12-18 months ago, and rates at that level are simply no longer appropriate.
Bottom Line: The BoC’s first rate cut of this cycle was a positive sign for markets, and we expect more cuts moving forward.
Elections
Since the beginning of the year, we’ve believed that certain geopolitical risks were not fully priced into markets, and that they could cause volatility. Recently, we’ve seen that exact scenario play out after major elections in Mexico and India. In Mexico, news of Claudia Sheinbaum’s election as president wasn’t greeted warmly by markets, with the Peso and equities both dropping. In India, prime minister Narendra Modi won re-election, but failed to capture a parliamentary majority as most had predicted. With a minority government, it will be harder and slower for him to pass his policy proposals, and that uncertainty is likely what caused some gyration in the Indian stock market. This doesn’t change our overall view on India, however—we still think the long-term growth fundamentals are strong, and we continue to anticipate increasing our exposure to India within our Emerging Markets allocation. A similar dynamic can be anticipated with the upcoming U.S. presidential election. Whether Biden or Trump wins may influence our allocation to particular sectors or geographies, but we think it’s unlikely to change the overall trajectory of U.S. markets.
Bottom Line: Elections often have a short-term impact on markets, but they rarely warrant a long-term shift in positioning.
Equities
Equity markets have continued to rally this year despite a cooling economy, and some analysts have speculated that a “wall of money” from money markets and cash equivalents will pour into passive equity allocations this summer, creating yet another tailwind. We suspect that it could take longer—the summer months tend to be a quieter period for trading, and there is also the U.S. election to consider. It’s true that there is lots of money on the sidelines, but in our view, investors may prefer to let the dust settle before jumping back into the stock market with both feet. They may also need to see multiple rate cuts from the Fed before their confidence is fully restored. When the time is right, conservative investors are likely to shift from cash to bonds or conservative equity portfolios, while those with a higher risk tolerance could seek out more balanced strategies. With Canada having already cut interest rates and a U.S. rate cut likely down the road, money sitting in cash is a virtual lock to come back to markets in some form. It just may be in the fall or winter rather than the summer, with a rate cut from the Fed unlikely until September or October at the earliest and the election set for November.
Bottom Line: Given uncertainty around rate cuts and the U.S. presidential election, we think investors might wait a bit longer before fully returning to equity markets.
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.
What does Biden pulling out of the U.S. presidential race mean for markets? With Tech stocks slumping, are concerns about a chip war between China and the U.S. warranted? And will the Bank of Canada cut rates again this week?
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.
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?
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.
What did we learn from the Fed’s reaction to the latest inflation data? How will election-related volatility manifest, and how big of an impact could it have on markets?
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When Will Cash Come Off the Sidelines?
June 10 to 14, 2024
When Will Cash Come Off the Sidelines?
June 10 to 14, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Interest Rates
Last week, in a much-anticipated decision, the Bank of Canada (BoC) lowered its key interest rate by 25 basis points—a move that was mirrored a day later by the European Central Bank (ECB). Market participants were on the bubble about the BoC’s decision, but as I mentioned in this space last week, we were confident it would happen. Overall, market reaction was relatively muted. The Canadian dollar (CAD) did drop somewhat before bouncing back. Canadian equity markets were also up, but so were U.S. and International exchanges, so the rise likely is not attributed to the rate cut. We anticipate the market’s reaction to get more pronounced as more rate cuts come through—and we do expect more cuts. The CAD is likely to continue to weaken as rates are lowered and the gap with the U.S. Federal Reserve’s (Fed) policy rate widens. On the other hand, rate cuts should be a positive for the Canadian bond market, especially relative to U.S. bonds. Looking ahead, the BoC highlighted that more rate cuts are likely coming, but also emphasized that, like their American counterparts, they’re still data dependent. That gives them an out if they feel they’re getting too far ahead of the Fed, or if an unexpected data point pops up. The ECB took a similar stance in its statement but was less definitive about future cuts. The reality is that in both Canada and Europe, the inflation picture is very different than it was 12-18 months ago, and rates at that level are simply no longer appropriate.
Bottom Line: The BoC’s first rate cut of this cycle was a positive sign for markets, and we expect more cuts moving forward.
Elections
Since the beginning of the year, we’ve believed that certain geopolitical risks were not fully priced into markets, and that they could cause volatility. Recently, we’ve seen that exact scenario play out after major elections in Mexico and India. In Mexico, news of Claudia Sheinbaum’s election as president wasn’t greeted warmly by markets, with the Peso and equities both dropping. In India, prime minister Narendra Modi won re-election, but failed to capture a parliamentary majority as most had predicted. With a minority government, it will be harder and slower for him to pass his policy proposals, and that uncertainty is likely what caused some gyration in the Indian stock market. This doesn’t change our overall view on India, however—we still think the long-term growth fundamentals are strong, and we continue to anticipate increasing our exposure to India within our Emerging Markets allocation. A similar dynamic can be anticipated with the upcoming U.S. presidential election. Whether Biden or Trump wins may influence our allocation to particular sectors or geographies, but we think it’s unlikely to change the overall trajectory of U.S. markets.
Bottom Line: Elections often have a short-term impact on markets, but they rarely warrant a long-term shift in positioning.
Equities
Equity markets have continued to rally this year despite a cooling economy, and some analysts have speculated that a “wall of money” from money markets and cash equivalents will pour into passive equity allocations this summer, creating yet another tailwind. We suspect that it could take longer—the summer months tend to be a quieter period for trading, and there is also the U.S. election to consider. It’s true that there is lots of money on the sidelines, but in our view, investors may prefer to let the dust settle before jumping back into the stock market with both feet. They may also need to see multiple rate cuts from the Fed before their confidence is fully restored. When the time is right, conservative investors are likely to shift from cash to bonds or conservative equity portfolios, while those with a higher risk tolerance could seek out more balanced strategies. With Canada having already cut interest rates and a U.S. rate cut likely down the road, money sitting in cash is a virtual lock to come back to markets in some form. It just may be in the fall or winter rather than the summer, with a rate cut from the Fed unlikely until September or October at the earliest and the election set for November.
Bottom Line: Given uncertainty around rate cuts and the U.S. presidential election, we think investors might wait a bit longer before fully returning to equity markets.
Positioning
For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled The Fed’s Last Stand: A Solitary Rate Cut Expected for 2024.
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.
Insights
Biden pulls out. What next?
Politics and profits: Finding wins in an election year
Is it time to swap Big Tech for Small Caps?
BMO ETF Portfolios’ July commentary: “Take the Money and Run, or Take it Easy?”
What can politics do to your portfolio?
Why American consumers are holding on—and Canadians aren’t