- Equity markets slid further this week, as the Federal Reserve stayed firmly hawkish, recession risks continued to build and geopolitical tensions weighed on sentiment.
- The S&P 500 fell 4.6%, and is now close to testing the low set in June. All sectors were in the red, with energy, consumer discretionary and banks hardest hit.
- Meantime, the TSX was down 4.7% on the week, with a dive in energy stocks coming alongside a move in WTI oil prices below $80.
Last week, the U.S. Federal Reserve again raised its key interest rate by 75 basis points. But have these aggressive moves done their job at cooling inflation? Prior to the release of the most recent U.S. inflation numbers, expectations were that the Fed would be raising rates by 50 basis points at this meeting before getting down to 25-point hikes by the end of the year. But those latest numbers showed that while headline inflation may have peaked, core inflation actually went up. That’s why the Fed continues to be hawkish and will continue with aggressive moves—it has determined that inflation is a greater threat than weaking labour markets or a softening economy. We heard that message loud and clear in Fed Chairman Jerome Powell’s speech at Jackson Hole and went underweight. But most investors didn’t hear it, which is why we saw markets react negatively to the inflation numbers. Another issue is that there are some things that the Fed simply can’t control, like supply chain issues. That’s why the Fed can’t get down to 2% inflation and is instead aiming for a number in the 3-4% range.
Bottom Line: Rate hikes have not been entirely effective at cooling inflation, and aggressive increases will continue as a result—making a recession more likely.
Bottom Line: Interest rate hikes and a strong US dollar are combining to hurt Emerging Markets, but that may be starting to change.
Bottom Line: It’s still a good opportunity to be overweight Energy.
Recently, we’ve adopted an even more defensive posture, taking off equities across the board in our portfolios. This decision was made even before the Fed meeting—as previously mentioned, we heard their message loud and clear, while it seems many investors didn’t. There are several reasons to be nervous about equities. Continuing aggressive interest rate hikes, which will impact the consumer, is an obvious one. But we’re also concerned about layoffs, which we saw in smaller companies earlier in the year. Now, companies like Meta (Facebook) and Alphabet (Google) are also talking about cuts, and consumer giant Walmart has announced that they’ll be hiring fewer people than usual for the holiday season. Those developments point to underlying issues in the economy and a weakening consumer. That’s why we’re taking risk off the table and reallocating toward fixed income and cash. Geographically, we remain slightly overweight Canada, neutral on the U.S., and bearish on Europe.
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 that comprises BMO Asset Management Inc. and BMO Investments Inc.
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.