Equity markets dipped this week alongside some mixed earnings results and decent overall economic data flow.
The S&P 500 dipped 0.5%, with Technology and Industrials down, while Energy and Utilities outperformed on the week.
Meantime, the TSX gave back 0.2% with weakness in Industrials and Utilities, along with choppy post-earnings action among the major banks.
Consumers
A couple of weeks ago in this space, I mentioned that we’d be closely monitoring Target’s earnings announcement for further signs of a shift in consumer spending. Previously, Walmart had reported great numbers tied to strong spending on lower-cost goods. Target’s numbers, which were released last week, didn’t look as great in comparison, but they did confirm the trend we’d suspected: even in stores that offer both higher-margin discretionary items and lower-priced staples, consumers are choosing the essentials. Walmart, in its earnings announcement, mentioned the consumers were looking for value buys. We’re also seeing this trend in other areas—airline and hotel business is down compared to the period immediately after COVID. People are still going on vacations, but now they’re looking for savings and discounts rather than paying full price. These developments highlight why we remain underweight Consumer Discretionary and overweight Consumer Staples in our portfolios.
Bottom Line: Consumer sentiment appears to be shifting, and as such, we continue to prefer Consumer Staples to Consumer Discretionary.
Bank of Canada
Has the moment finally arrived? This week, the Bank of Canada (BoC) meets for its much-anticipated interest rate decision, and the consensus expectation—which we share—is that they will cut rates for the first time this cycle. The economic data shows a weakening consumer, a slowing economy, and a wounded housing market, as well as an improving inflation picture. Together, that’s a pretty compelling case for easing rates. Furthermore, it is highly anticipated that the European Central Bank will be cutting shortly thereafter, so the BoC would not be alone. That said, we expect the BoC to remain data-dependent going forward—if the economic numbers stay relatively flat or deteriorate further, then they’ll likely keep cutting rates. If the rate-cutting cycle does begin this week, that could give a bit of a boost to the Canadian market, and especially Canadian bonds. However, it will also put pressure on the Canadian dollar, which is something the BoC will have to be mindful of.
Bottom Line: While not a certainty, we think the BoC will cut rates this week, potentially providing a boost to Canadian markets.
U.S. Equities
With earnings season now over, should investors expect some “selling on the news?” In short, yes—we anticipate some profit-taking as we head into the summer months. We don’t think money’s going to leave the market necessarily, but there could be a rotation to companies with lower price-to-earnings (P/E) multiples, which are perceived to be safer investments. We were a little surprised to see Nvidia continue to move higher even days after its earnings announcement. This shows that there’s still room for some big names to move up, and is also likely tied to Nvidia’s stock split and dividend increase, which broaden the company’s investor base. Overall, it’s likely that some areas that demonstrated good earnings potential will start to show some weakness, which could play out as a rotation to other names and sectors. In particular, we expect Financials and Healthcare to benefit. The key takeaway, however, is that we’re likely to start seeing a bit more volatility in markets, as well as some short-term downside pressure until the earnings cycle picks up again.
Bottom Line: On the heels of earnings season, we expect to see some profit-taking and a rotation to areas like Financials and Healthcare.
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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.
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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.
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Will the Bank of Canada Be First to Take the Leap?
June 3 to 7, 2024
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June 3 to 7, 2024
Sadiq S. Adatia, CFA, FSA, FCIA
Market Recap
Consumers
Bottom Line: Consumer sentiment appears to be shifting, and as such, we continue to prefer Consumer Staples to Consumer Discretionary.
Bank of Canada
Bottom Line: While not a certainty, we think the BoC will cut rates this week, potentially providing a boost to Canadian markets.
U.S. Equities
Bottom Line: On the heels of earnings season, we expect to see some profit-taking and a rotation to areas like Financials and Healthcare.
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.
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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