May Market Update

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Portfolio Management

The following is from the BMO Investment Strategy Team

A Welcome Reprieve

The S&P 500 has Stabilized but Our Call Has Not Changed: Use Strength to Reduce Risk in Portfolios

Investors dodged a bullet when Trump recently paused the imposition of extremely high tariffs on most trading partners. To use an extreme example, Madagascar was in the firing line for 47% tariffs. This struck us as both absurd and sad for its impoverished people. As widely reported in the media, it was the outsized weakness in the U.S. Treasury Bond market which may have convinced the Trump Administration to relent for now. And for good reason. The fact that U.S. stocks, bonds and the U.S. dollar all went down in unison was a clear sign that the U.S. is losing some of its safe-haven halo. This is in stark contrast to what we saw at the height of the financial crisis in 2008 when U.S. Treasuries fulfilled their role as a safe asset class, thus helping mitigate the damage in well diversified portfolios.

 

A second bullet was dodged when Trump stated he had no intention of firing Federal Reserve (“Fed”) Chairman Jerome Powell after all, despite threatening to do so repeatedly. Had he carried through on his threats, it would have been a very negative catalyst for the market. In our opinion, U.S. stocks, bonds and the greenback would have gapped down again significantly as investors (particularly on the fixed income side) would have to price in higher potential inflation and a further erosion of credibility. In such a context, “forced” Fed interest rate cuts would likely be totally ineffective in stabilizing risky assets like stocks and high yield bonds. As our BMO Economics partners noted: Central bank independence is critical for maintaining long-term stability of both inflation and growth. The Fed’s credibility is easier to uphold when investors, businesses and consumers believe it is fully committed to price stability and insulated from political interference. Under these conditions, inflation expectations are more likely to remain anchored to the inflation target, reducing the need for aggressive actions.

 

 

Since then, many traders have rallied around the notion that we may have reached peak tariff uncertainty and that trade deals being struck – for instance, an agreement with India seems likely in the short term – will act as positive catalysts for the market. We are already seeing this positive effect with the market having recovered a lot of ground. Recent reports suggest that the U.S. and China are both taking steps to begin de-escalating their trade war. On that front, our technical analyst, Russ Visch, thinks that the bias for equities should remain to the upside over the next few months. However, his long-term timing model remains negative after giving a new sell signal in the first quarter, meaning that the second half of the year does not look nearly as rosy from a technical perspective. While any marginal improvement from a very precarious macroeconomic position is welcomed, we strongly believe that reducing risk on strength is the right approach ahead of what could be a more challenging environment in the back half of 2025.

 

The question at this point is whether the immense damage already done to the credibility of the most powerful country on earth can be reversed. We think it can, but it will take considerable time and effort. In the meantime, our recession probability model continues to show increasing risk to the economy, and that is even before the real impact from tariffs has been felt. To be more precise, we now see about 55% odds of recession in the 12 months, up from under 40% at the end of last year.

 

 

Corroborating our data, the University of Michigan Consumer Sentiment Survey recently fell to a 45-year low south of the border, and the vast majority of corporate executives expect a recession this year. To us, this looks like a recipe for cash conservation behaviour rather than big corporate or personal investments/expenditures. Perhaps even more problematic, the outlook for inflation over the next year rose from 5% to 6.7% (the highest since November 1981), and the inflation outlook five years out, which is what the Federal Reserve looks at most closely, hit 4.4% (the highest since June 1991). This will make it tougher for Jerome Powell & Co. to cut rates and stimulate the economy.

 

The U.S. earnings season has seen some notable beats (e.g., Microsoft, Meta) but also several very cautious comments with guidance being lowered or withdrawn across a range of industries due to tariff uncertainty. This tells us that corporate earnings will continue to be pressured to the downside. We started the year at $274 of operating earnings and are now at $264 with a strong downward trend.

 

 

A Brief History of Tariffs

As the chart below shows, even with the postponement of full reciprocal tariffs, the average rate is back to levels not seen since the beginning of the 20th Century.

Figure 7: Average Tariff Rate – United States (%)

U.S. ‘reciprocal’ tariffs are much higher than expected, except on Canada and Mexico. Average rate of over 25%, then to 10% (except for China: 145%). Also, 25% on steel and aluminum (March 12); and autos (April 3). Pending tariffs on lumber, copper, and semiconductors. China retaliated @ 125%.

Source: BMO Economics

Clearly, the lessons of history have gone unlearned. This round of unprovoked trade aggression hearkens back to the Smoot-Hawley tariffs of 1930. In a nutshell, that was the year U.S. President Herbert Hoover imposed punishing tariffs on 20,000 imported goods. In May 1930, Canada, the country's most loyal trading partner, retaliated by imposing new tariffs on 16 products that accounted altogether for around 30% of U.S. exports to Canada. Canada later also forged closer economic links with the British Empire via the British Empire Economic Conference of 19321. Economists generally agree that these trade actions, while not causing the Great Depression, made it far worse than it would have been otherwise.

On a more positive note, investors should also remember that there are a number of high-quality Canadian companies that have strong balance sheets and resilient cash flow streams. Most importantly, they have a proven track record of successfully navigating volatile macro environments and exogenous shocks. Our team has identified many high-quality stocks and bonds which can weather volatility and lead to outsized gains for patient long-term investors, particularly when bought on weakness.

 

Our Portfolio Management Approach

We are fundamental investors that use technical analysis to manage short-term market risks. We believe that risk management is not a choice, but a necessity. While we cannot control how much downside the market provides during a correction, we can control how much of the downside your account receives. We aim to avoid 60% or more of the decline in any significant downturn. Without our process, there is a good chance you will experience 100% of the downside from the market. We will help you navigate the risks and rewards of the market so that you can stop worrying about your money and start living your life.

 

Transactions

This month was a busy month in the accounts We converted half of our USD cash to CAD and started to invest overseas and added to our Canadian Nnmes.

The following is a chronological list of the trades:

• Bought 1% position in EWG – iShares Germany ETF
• Bought 1% position in ZDI – BMO International Dividend ETF
• Bought 1% position in VIDY – Vanguard Developed Ex North America High Dividend Fund ETF

• Sold Amazon at $178.99 (bought it at $161.04).

Here is the technical breakdown – a steady uptrend, but it broke through the bottom of the line

First leg down 55 points, the second leg usually matches the first so 206 – 55 = 151.

We could see Amazon reach this low.

• Sold Microsoft at $373.68 (bought it at $372.65).

Again, it broke through the downside of the trading range (the blue area), and the measured move is to around 301.

• Converted half of our USD cash to CAD

 

• Bought XSP at $54.03 - down 15% from the highs

 

Rebalanced the bonds to be full weight and rebalanced the cash in all accounts.

 

Added to:

• IFC – Intact Financial Corp
• CU – Canadian Utilities Ltd
• DIR.UN – Dream Industrial REIT
• Added 1% to EWG, VIDY, ZDI
• Added to X – TMX Group
• Trimmed LUG – Lundin Gold to 0.6% (bought at $18.59 sold at $56)

LUG is very extended and rip for a pullback:

 

 

Returns on our 60/40, 70/30 & 80/20 Portfolios BEFORE FEES:

 

Interesting Charts

 

 

TECHNICAL COMMENT

• The April monthly candlestick was a bear doji closing in its upper half with a long tail below and closing around the 20-month EMA.
• Last month, we said traders would see if April’s candlestick could close as a strong bear bar near its low or with a long tail below instead.
• The market traded significantly lower early in the month followed by sideways to up, erasing most of the move.
• The bears got a strong selloff in April, but the large reversal and long tail below the candlestick indicate they are not as strong as they hoped.
• They hope to get a retest of the April 7 low, even if it only forms a higher low.
• If the market trades higher, they want it to form a lower high. They want the bear trend line to act as resistance.
• They want May’s candlestick to close with a long tail above or with a bear body closing below the 20-month EMA.
• The bulls see the market forming a major higher low. They hope the selloff (Apr 7) has alleviated the overbought conditions.
• They want the market to continue in a broad bull channel followed by a breakout above the all-time high.
• The bulls need to create a strong bull entry bar in May to increase the odds of a resumption of the trend.
• The market formed a big move down in April, followed by a big move up.
• Big Down, Big Up creates big confusion and usually leads to a trading range.
• For now, the market could still trade slightly higher.
• Traders will see if the bulls can create a strong bull entry bar in May. If they do, that can swing the odds in favor of a resumption of the broad bull channel.
• Or will May trade slightly higher but close with a long tail above or with a bear body instead?

Planning Article

ESTATE PLANNING for modern families in a post-Brady Bunch era

Estate & Trust October 16, 2023

Lydia Potocnik, LL.B., TEP, FEA Head, Estate Planning and Philanthropic Advisory Services, BMO Private Wealth

 

1969 was an influential year for many reasons – Woodstock, the first man on the moon, John Lennon’s bed-in for peace – but what no one realized at the time was the most important story was the one about a lovely lady and man named Brady.

That September, The Brady Bunch, which saw two single adults, each with three children, marry and move in together, upended ideas around what it meant to be a family. With shows such as Full House, Modern Family and This is Us pushing these dynamics even further, family is now whatever you want it to be.

These depictions have had an impact: nearly 12% of two-parent families are step-families, while the number of multi-generational homes has grown by 45% since 2011, according to Statistics Canada. However, there’s one thing missing in pop culture’s conversations around modern unions – how to financially plan for what are often unique family situations.

Advising the new family dynamic

Estate planning has certainly become more complex over the last several years, in part because of how varied families have become, but also thanks to more advanced reproductive technology, cohabitation, multi-family living arrangements and other household trends.

“In the 1950s, society was all about the nuclear family,” says Lydia Potocnik, Head of Estate Planning and Philanthropic Advisory Services at BMO Private Wealth. “But ideas of family have now shifted to reflect a more diverse and inclusive society where families are made up of children from previous marriages, same sex couples, common-law spouses and single-family households.”

As ideas around marriage and children have changed, so too have estate planning conversations. Many advisors and wealth professionals are now focusing on the non-technical, human side of estate planning. This means talking to your advisor about more than just money, including the details of your unique family dynamics. Transparency is critical: the more open and honest you are about your specific family structure, the more tailored the advice and recommendations you’ll receive.

Advice will vary depending on those needs, of course. For instance, you may need to establish trusts to care for a specific person or purchase life insurance to even out assets between children. Dividing assets among blended families, especially if there is a family business to pass on, can create extra complications.

Provinces take different approaches to modern families

When creating an estate plan, you’ll need to understand how the province you reside in treats modern families – and there are different rules in different locales. For instance, in most jurisdictions, married and common-law couples are treated differently in estate matters. If you pass away without a Will, most provincial legislation provides no protection to common-law partners. Unmarried partners aren’t automatically entitled to a share of the estate since the intestacy rules in most provinces only apply to married couples. It’s all the more important for common-law spouses to turn their minds toward formulating a cohabitation agreement.

In Quebec, the rules are even more unique. There, de facto spouses are not recognized by the Civil Code of Quebec, which means that if only one of the spouses owns the principal residence, “the other spouse could be left without a home if there was ever a dispute,” explains Chantal Moreau, Director, Estate Planning at BMO Private Wealth, who serves clients out of Montreal. “That can lead to some pretty difficult situations.”

One way to deal with this risk is to set up a cohabitation agreement, which can be used in a separation (alongside a Will in the case of death) to specify arrangements between common-law couples not recognized by law. “Unfortunately, not enough people sign cohabitation agreements,” says Moreau.

Whether a couple has a cohabitation agreement or a more standard marriage contract, the document should align with the Will to prevent potential disputes when a spouse dies, says Moreau.

Apart from common-law relationships, Quebec also treats trusts a little differently. With a testamentary or another trust, an independent trustee must be named to act. Therefore, the person who established the trust or a beneficiary could not act as sole trustee.

Communicating the estate plan

A well-thought-out estate plan that considers laws in different provinces can help keep the peace in a family when a loved one dies, but there are other hurdles you should clear before developing a plan.

The first? Communicating wishes to beneficiaries. Too often, parents will keep their plans private from their children, says Potocnik. While that can complicate things in traditional families who may have different ideas on how they want to distribute the estate, it’s even more complex when stepchildren are involved. “Unfortunately, I have seen families fall apart because adult children and beneficiaries don’t understand the reasoning behind the estate plan,” she says.

Families fret about these talks, but getting over the fear of the conversation is often the hardest part. Potocnik had a client who wanted to leave his business to his two adult stepchildren, who are actively involved in the company. He didn’t, however, want to leave out his three adult children from his first marriage. He considered using insurance to make sure everyone was treated equally, but a cancer diagnosis prevented him from getting a policy. Naturally, he was worried about how his family would react, but thankfully, his three children – who had built their own successful careers – were on board with their father’s plan. It was a huge relief to everyone, and he was only able to move forward because he sat down with his family and expressed his wishes as to how he wanted to divide up his wealth.

While the outcome was positive, this example underscores the importance of good communication and having those family discussions in advance. “It gives parents an opportunity to explain or rationalize the estate plan that was put into place and mitigate conflict and even potential litigation when the parents are gone,” says Potocnik.

Keeping the estate plan current

Family feuds and legal battles can also crop up when an estate plan isn’t updated, especially when family circumstances have changed. For instance, if someone gets divorced and remarried and then passes away before updating their Will to include the new spouse or stepchildren.

Some couples delay updating their estate plans for years, either because they’re busy or they can’t agree on how to divide their assets among the new blended family, says Potocnik.

Plans also need to be flexible and revisited regularly, adds Moreau. “Some people try to make these documents effective for the rest of their lives, which is a mistake,” she says. “Instead, they need to be modified every few years to reflect the changes that inevitably occur in most people’s lives.”

The new estate planning approach

The more human and holistic approach to estate planning ultimately ensures everyone you care for and about is well looked after, Potocnik says.

“I often remind clients that they’ve worked hard to accumulate and grow their wealth,” she says. “It’s therefore important to have a well-thought-out estate plan where you’re transitioning those assets to the next generation or to beneficiaries that are important to you, whether that be individual family members or charities.”

Estate planning for the modern family is usually more complicated, so take the time to do it properly. “At BMO Private Wealth, we take a unique and customized approach to every family to ensure their needs are looked after and their loved ones are protected,” she says.

 

Millennial Minute

Have you ever felt that deep seeded fear that strikes you when you’re thinking about your finances? In the words of Eminem, do your palms get sweaty, knees weak, arms are heavy? If you have, or you do, you may have money dysmorphia, and it may be more common than you think.

 

Click here to read more!

 

Our Extended Team

We are so much more than just investment management. We have an extended team of professionals to assist with all aspects of wealth planning. From Estates to Insurance, Financial Planning to Tax Planning and Business Succession, we have the professional to speak to!