Around the middle of December, advisory firms and the people who work for them start putting out their retrospectives regarding the year that is just about to end and / or offer their forecast for the new year. I have long argued that forecasting is a mugs game. To the extent that I have grudgingly participated in the exercise previously, I have found it to be humbling. As such, I want to stress that what follows is not so much a forecast as it is a concern for what may – and I stress MAY – come to pass in light of what we already know about the incoming administration south of the border.
To begin, the President-elect is a criminal. He has literally been convicted of 34 felonies. This is in addition to two impeachments, various infidelities, an attempted insurrection, and the stealing of highly classified state secrets. We now have a good sense of what his cabinet will look like: assuming most of his forthcoming nominees are ultimately appointed. This is a man who is quite willing to appoint incompetent sycophants who will help him expand his ongoing criminal activity at the expense of more traditional character traits like relevant education, experience, and character. The notion of traditional public service seems to be foreign to many would-be cabinet appointees.
Will Trump manufacture a Recession?
Early in December, I was in Southern California and spoke with the founder of an AI company in Silicon Valley. He told me there is a theory making the rounds that Donald Trump intends to do something highly unconventional in his longstanding pursuit personal self-interest. The executive told me that a number of thought leaders are of the opinion that Trump intends to deliberately manufacture a recession immediately upon taking office.
Their view is that, given the experiences of both the global financial crisis and the COVID crisis, it has become apparent that when the economy is severely threatened and bailouts are required, billionaires and plutocrats end up doing very well. Meanwhile, ordinary middle-class people and those even lower on the social spectrum fall further behind.
In the aftermath of the election on November 5th, American capital markets responded favorably based on the presumption that lower taxes and less regulation would be highly stimulative and favourable for the economy. This view held sway even though the President-elect campaigned on a platform of indiscriminately-high tariffs, mass deportations, and a draconian cutting of government services via the department of government efficiency (DOGE).
There are some who fear that the promise to rein in the debt will be used as an excuse to cut back on government programs that ordinary Americans rely on. As it stands, approximately three quarters of all U.S. annual expenditures are fixed in law and allocated toward entitlements such as Medicare, Medicaid, and Social Security, as well as interest on the national debt.
Cutting US$2 trillion from the budget is simply impossible without encroaching on at least some of these programs. Stated differently, even if Trump were to cut all other programs (including the CIA in the SEC) to zero, the savings would still be less than the $2 trillion a year he pledged to cut. He will, of course, blame Joe Biden for “the mess he inherited” either way.
No fiscal Conservatives left in America
Meanwhile, the evidence shows that for over half a century, the U.S. accumulated debt has been growing under both major parties. It seems there are no fiscal conservatives left in America. Again, I stress, this is not a forecast, but rather a recounting of a narrative that several thoughtful people who live south of the border believe to be plausible. If you think wealth inequality and income inequality are a problem now, you could be in for a rude awakening if anything close to this narrative comes to pass.
As many people know, I have long been a proponent of efficient capital markets. Any person who espouses this view believes that prices reflect all available information to the point where it is impractical to think that mispricings are sufficiently large and identifiable so as to allow people to engage in trading that would allow that person to make material profit. The American stock market clearly does not subscribe to the narrative I’ve just outlined. Of course, consensus opinions can be wrong. In this instance, perhaps more than any other in my lifetime, I actively want the consensus to be correct. Continue Reading…
While there is only one trading day left in 2024, it is clear that it is another year that fooled everyone. The year 2023 fooled economists and market prognosticators with U.S. stocks up over 26% in U.S. Dollars (and up more in Canadian Dollars). 2024 is shaping up as a carbon copy in performance and in big swing and miss predictions. Canadian stocks are looking to finish the year up over 20%. Good luck making predictions as we enter 2025: a zero visibility age. Trump economic ‘policy’ will likely shape the year. There’s just no tellin’ what will happen.
But before we move on to 2025, some Santa stock market rally housekeeping.
As can be seen from the chart, a Santa rally has successfully occurred 18 times out of 24 in the 2000s. One year saw a flat performance, while five years saw a decline, including as recently as 2023.
But so far, Santa read the Trump economic policy and went back into Santa’s house to have a nice hot chocolate. Here’s the equal-weight S&P 500 (RSP), more representative of broader market sentiment.
Or maybe Santa went inside for something a little stronger, perhaps a few hot totties.
And more holiday fun …
Did a rally start last Tuesday? Who knows. True, US and Canadian markets took a big hit down yesterday with the Dow down 418.5 points or 1% and Nasdaq fell 1.2% (Monday, Dec. 30th). But it doesn’t really matter it’s obvious that 2024 was a wonderful year for investors who stayed the course, stayed invested; for investors who stuck to their investment plan. The final returns for stock markets will simply be statistics for the record books.
Trumpenomics and 2025
In the Globe & Mail John Rapley did a nice summary of the battle between the Fed, bond markets and Donald Trump’s economic ‘policy’. I put policy in quotes because the incoming U.S. President’s platform is currently more threats than anything else.
Here’s a key paragraph …
But it now looks like the Fed may be girding for a battle with the administration, with some governors hinting that they’re beginning to factor the inflationary impact of his policies into their own projections. If they decide to counterbalance a loose fiscal policy with a tight monetary one, the economic prognosis may well change.
Translation: proposed Trump tax cuts and looser regulations will battle with inflationary tariffs and deportations. Add in crippling U.S. debts and deficits. The bond market has been moving rates higher. The stock market (other than the magnificent tech) is moving lower over the last month. Both stocks and bonds are repricing Trump. But Trump is like a box of chocolates – you don’t know you will get.
The zero visibility age
Ian McGugan (also in the Globe & Mail) frames why forecasts are likely to be wrong (again) in this zero visibility age …
The simple explanation for these forecasting failures is that the world has entered some very odd economic territory. Lingering effects of pandemic weirdness, manic exuberance around artificial intelligence and a surprising resurgence of strongman politics are helping to create a thick fog of uncertainty.
It’s a weird mix of optimism, fear and uncomfortable uncertainty that can make you make all kinds of strange (and uncomfortable screwed-up) expressions. Continue Reading…
Stocks are expected to outperform bonds over the next 10 years but EAFE and Emerging Markets will probably do a little better than U.S. and Canadian equities, portfolio managers for Franklin Templeton Investment Solutions told advisors and the media in its 2025 Outlook session held Thursday in Toronto. The twice-annual economic outlook marks the 70th year that Franklin Templeton has operated in Canada: Sir John Templeton’s famous Templeton Growth Fund was launched in Canada in 1954. It has been in the U.S. more than 75 years.
Senior Vice President and Portfolio Manager Ian Riach [pictured left] said in a presentation distributed to attendees that “expected returns for fixed income have become slightly less attractive as yields have moved lower over the past year. EAFE and Emerging market equities [are] expected to outperform U.S and Canadian equities.” The most likely path to stable returns will be through “a diversified and dynamic approach,” he said.
Shorter-term Macro themes
Addressing major shorter-term themes, Riach said the United States continues to lead in Growth, while Canada is improving and the rest of the world is “challenged.” Inflation continues to trend down but some areas are faster than others. Fiscal policy “remains supportive” while “central banks remain data dependent.”
Addressing Canadian economic growth, Riach said Canada’s inflation backdrop “continues to surprise to the downside” and is now at target levels as leading indicators continue to improve from weak levels. Thus far, Canadians holding mortgages have not yet been impacted by higher interest rates, based on the cumulative share of mortgages outstanding in February 2022 that have been subject to a payment increase.
Economic Growth in Europe and Asia.
European sentiment is improving but remains at weak levels while Asian manufacturing “has started to fall,” he said. Economic growth in China remains weak: “Consumer sentiment has yet to recover from deteriorating property sector and labor market imbalances.”
Addressing Emerging Markets ex China, Riach said weakening leading manufacturing indicators will “challenge upside potential of cyclical regions broadly.”
In the United States, AI-related stocks (Artificial Intelligence) continue to power U.S. earnings growth expectations. However, Riach said, “this has been broadening to the ‘forgotten 493’ somewhat.” (i.e. away from the Mag 7.)
Inflation much improved
Worldwide, inflation is much improved and is now below Central Bank targets, Riach said.
Asset Allocation
Moving to recommended portfolio positioning, Franklin Templeton is overweight equities, underweight bonds and neutral on Cash. Within stocks, it is overweight Canadian and U.S. equities, Underweight EAFE (Europe Australasia and Far East) and Neutral on Emerging Markets.
The second major presentation was delivered by Jeff Schulze, Head of Economic and Market Strategy for Franklin Templeton’s ClearBridge Investments. Schulze [pictured on right] is known for his “Anatomy of a Recession” analytical work, which assesses 12 variables that historically foreshadow recession.
However, as the chart below shows, the recession dashboard is currently signalling expansion rather than recession:
Addressing employment, Schulze said that while the pace of job creation has slowed substantially over the past few years, “it has settled in line with the pace experienced during the previous economic expansion.” As a result, U.S. consumer spending is robust. Continue Reading…
Conservative investors: Follow our three-part Successful Investor if you want to maximize your portfolio returns with the least amount of risk
Pixabay: Gerd Altmann
The surest way for conservative investors to make money in stocks is to start out by following our three Successful Investor rules for sound investing. They are the foundation of our Successful Investor system.
The first of these three Successful Investor rules is to invest mainly in well-established, profitable, dividend-paying companies. This rule goes first because it’s a simple and effective way of controlling the risk in your portfolio. Needless to say, that control is especially important when you have retired and you depend on your investments for income.
If a stock lacks one of these signs of investment quality, it may be riskier than you realize, yet still offer long-term potential. If it lacks two of the three, it exposes you to above-average risk and is suitable mainly for aggressive investors. If it lacks all three, it’s a high-risk speculation.
If you want to buy stocks missing all three of these qualifiers, it’s best to do so only with money you can afford to lose.
Avoid the urge to diversify into junior or riskier stock groups, just because they might offer the possibility of bigger gains. Stick with stocks that leave you feeling comfortable.
Diversification across sectors is also key for conservative investors
The second rule for conservative investors in our system is to spread your investments out across most if not all of the five main economic sectors: Manufacturing & Industry; Resources & Commodities; Consumer; Finance; and Utilities.
When you follow this rule, you are taking note of the fact that a large random element is at work throughout the financial universe.
When you spread your holdings out like this, you diversify in a way that helps you avoid overloading yourself with stocks that are about to slump.
Unpredictable slumps may be due to weak industry conditions, changes in investor fashion, or other random factors. That’s a bigger risk if you concentrate your stock holdings in one or two of the five main sectors.
Simply staying aware of the concept of diversification can put you ahead of inexperienced investors who take a casual approach. But, beware of half-hearted diversification. It can hurt your investment results, rather than help.
For instance, beginners may zero in on investments that seem to have huge growth potential. Today’s examples might include concept stocks that focus on lithium mining, say, or AI (artificial intelligence), or cryptocurrency. If you disregard our first Successful Investor rule (see above), you’ll mainly wind up buying high-risk speculations that pay off sporadically at best. Continue Reading…
Investing doesn’t have to be intimidating. Learn how BMO’s Asset Allocation ETFs are designed to take the complexity out of the equation, giving you an all-in-one solution that balances your portfolio without all the stress and second-guessing.
Image courtesy BMO ETFs/Getty Images
By Zayla Saunders, BMO ETFs
(Sponsor Content)
Have you ever found yourself thinking, “I really want to start investing, but where do I even begin?”
It’s easy to feel overwhelmed: between all the jargon, acronyms, and that mysterious “ticker talk” (yes you got it, those ETF symbols), it can seem like a lot to handle. Figuring out what to invest in, how much of each asset to hold, and when to rebalance? It’s enough to make anyone feel stuck, even the most analytical among us.
But here’s the thing: investing doesn’t have to be intimidating. BMO’s Asset Allocation ETFs are designed to take the complexity out of the equation, giving you an all-in-one solution that balances your portfolio without all the stress and second-guessing.
What are Asset Allocation ETFs?
Asset allocation ETFs are portfolios built with a pre-determined asset mix. Within that mix, you’ll find a variety of asset classes, like fixed income and equities, across various indexes, sectors, and countries. Instead of having to manually automate and rebalance your portfolio, these ETFs have an automated re-balance set to bring it back to your determined asset mix, for a low cost.
For example, the BMO All-Equity ETF (ZEQT) focuses on growth by allocating a higher percentage to equities, while the BMO Conservative ETF (ZCON) has a conservative approach with a higher allocation to fixed-income securities. This flexibility means that investors, whether just starting out or nearing retirement, can find a product that matches their goals.
Asset allocation ETFs provide a one-stop-shop for those looking for broad diversification, considering each investors unique goals and desired asset mix.
Solving a Problem: The Origins of Asset Allocation ETFs
To understand the popularity and importance of asset allocation ETFs, it can help to look back in time to how these useful tools came to existence. The concept was born out of a problem faced by many investors: managing a diverse investment portfolio, while sticking to their chosen asset allocation.
Imagine an investor in the early 2000s with a mix of individual stocks, bonds, and perhaps some mutual funds. Every year, they had to review their portfolio and adjust the weightings to match their evolving goals, all while considering tax implications, trading costs, and time constraints. Not only was this time-consuming, but there was also room for human error—sometimes leading to portfolios that were overly concentrated in certain sectors or regions.
The financial crisis of 2008 further highlighted the need for better portfolio management. Investors who had failed to properly diversify or rebalance suffered significant losses, while those who had a more disciplined approach weathered the storm more effectively. Recognizing these challenges, ETF providers like BMO saw an opportunity to create a product that simplified the investment process. The idea was simple but powerful: create an all-in-one ETF that would offer diversification, automatic rebalancing, and cost efficiency. By using ETFs as the building blocks, providers could offer exposure to global markets and different asset classes at a fraction of the cost of traditional mutual funds. Thus, the asset allocation ETF was born.
Source: BMO Global Asset Management, BMO Growth ETF (ZGRO:TSX), as of September 18th 2024
The portfolio holdings are subject to change without notice and may only represent a small percentage of portfolio holdings. They are not recommendations to buy or sell any particular security.
Why does the Mix Matter?
The famous Brinson, Hood, and Beebower (BHB) study, published in 1986, found that over 90% of a portfolio performance variability is driven by asset allocation, not stock picking or market timing.
This shifted how investors approach portfolio management, emphasizing the importance of diversification across asset classes for long-term success. Most asset allocation ETFs, or funds for that matter, are now built on this principle. Reinforcing the idea that asset allocation, rather than stock-picking or timing, drives the bulk of long-term investing success: a perfect fit for investors looking for a hands-off “couch-potato” way to build their wealth.
Why Asset Allocation ETFs?
Simplicity and Convenience
Asset allocation ETFs take care of the heavy lifting. With automatic rebalancing and built-in diversification, you get a hands-off investment strategy.
Diversification
These ETFs provide exposure to a broad mix of global stocks, ensuring you’re well diversified across sectors and regions, whether you prefer a conservative, growth, or somewhere in-between approach.
Cost-Effective
One of the biggest advantages of ETFs is their cost-effectiveness, and BMO asset allocation ETFs are no exception. Additionally, with fewer transactions needed to maintain the portfolio, investors can avoid high trading costs.
Long-term Focus
Asset allocation ETFs are designed with a long-term perspective in mind, making them ideal for investors focused on building wealth. By keeping a steady asset mix and rebalancing regularly, these ETFs help investors avoid emotional decision-making that often leads to buying high and selling low.
The T Series: A Tailored Solution for Retirees
One of the newer innovations in BMO’s lineup of asset allocation ETFs is the T series1, specifically designed for retirees and those nearing retirement. Retirees often face the challenge of generating a steady cash flow from their investments while minimizing the risk of running out of money. The T series solves this problem by offering a systematic withdrawal plan, allowing investors to receive monthly cash flow helping to ease retirement planning.
For example, the BMO Balanced ETF (T6 Series) (ZBAL.T) is a T series ETF designed to provide steady cash flow by investing in a balanced mix of equities and bonds. The fund pays out fixed monthly distributions (6% annualized)2 that are a blend of income and return of capital, which is especially valuable for in retirement.
Conclusion
BMO Asset Allocation ETFs offer a simple, diversified, and cost-effective solution for investors at every stage of life. Whether you’re just starting out, looking for steady growth, or planning for retirement, these ETFs provide the perfect blend of convenience and financial security. For retirees, the T series includes the benefits of consistent cashflow, making it easier to manage withdrawals during retirement.
With BMO’s asset allocation ETFs, investors can feel confident in their financial future, knowing they’ve chosen a product that aligns with their long-term goals and offers peace of mind in any market condition.
For more information visit BMO Global Asset Management to learn more.
1 T series – These units are Fixed Percentage Distribution Units that provide a fixed monthly distribution based on an annual distribution rate of 6%. Distributions may be comprised of net income, net realized capital gains and/or a return of capital. The monthly amount is determined by applying the annual distribution rate to the T Series Fund’s unit price at the end of the previous calendar year, arriving at an annual amount per unit for the coming year. This annual amount is then divided into 12 equal distributions, which are paid each month.
2 Standardized Performance: ZBAL.T, BMO Balanced ETF (T6 Series) 1 Year: 15.91%, Since Inception: 5.96% as of August 30th, 2024.
ZGRO.T, BMO Growth ETF (T6 Series) 1 Year: 18.78%, Since Inception: 14.61% as of August 30th, 2024.
Zayla Saunders is Senior Associate, Online Distribution for BMO Exchanged Traded Funds. As a member of BMO Global Asset Management’s ETF Direct Distribution Team, Zayla brings more than a decade of experience in finance. She holds the Chartered Investment Manager (CIM) designation is a graduate of the University of Manitoba. Since joining BMO in 2020, Zayla has focused on making ETF investing accessible through strategic partnerships content creation, and industry collaborations. Know for her client-focused expertise and investment knowledge, she empowers investors to make informed, confident decisions.
Disclaimer:
This article has been sponsored by BMO ETFs.
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By John De Goey, CFP, CIM
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