Podcast: Unpacking the Latest U.S. Economic Data

The Federal Reserve left rates unchanged on Wednesday — hinting cuts aren’t coming soon. In today’s U.S.-centric episode, portfolio managers Winnie Jiang, Chris McHaney, and your host, Erika Toth, analyze the latest economic data. They also discuss the upcoming presidential election, fixed income positioning and factor exposures.

Erika Toth is a Director of ETF Distribution at BMO ETFs. She is joined on the podcast by Winnie Jiang and Chris McHaney, Portfolio Managers and ETF Specialists at BMO Global Asset Management. The episode was recorded live on Wednesday, January 31, 2024.

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US Elections

It looks to become more certain that Donald Trump will be the Republican candidate. We can expect that a rate cutting cycle would have already have started either before the election happens or before a new president is elected. The market is projecting five or six rate cuts this year, so three or four before the election and then one or two more before year end. Looking at the Federal Reserves economic projections and their dot plots, they are anticipating two to four rate cuts this year. The fiscal policy that that each of thee candidates could put in place could affect the Feds future decisions. If Donald Trump became President, he would talk down interest rates and put pressure on the Fed to cut further. If Joe Biden or a Democratic nominee wins the election and they choose to provide more economic support which can be inflationary, interest rates may have to stay higher. Hard to map out what might happen, but you might think lower rates with a Republican, and higher for longer with a Democratic winner.

Fixed Income

Cash was very popular last year with investors wanting to lock in high short term rates. With the rate hiking cycle potentially coming to an end, GICs and money market funds may lose their appeal. It’s fair to probably expect that money to flow into long duration products. The big question is when should investors start adding duration. Right now, it may make sense to hold on to BMO Ultra Short-Term Bond ETF (Ticker: ZST) and then buying BMO Long Federal Bond Index ETF (Ticker: ZFL) after the central bank makes their first cut. For two reasons, first the long end of the curve is extremely volatile. As well, central banks will likely remain cautious about a policy pivot. For investors who want to play it safe and not time the market, using BMO Aggregate Bond Index ETF (Ticker: ZAG) is a good choice because it covers the entire yield curve.

Factors

There may be some concerns around the concentration and valuation of the Magnificent Seven within the broad index. If you are looking for Factor exposure as an alternative, BMO US Dividend ETF (Ticker: ZDY) can give you access to market growth, but in a more measured fashion instead of a concentrated index that is very tech heavy. If you are more concerned with a market pullback, BMO Low Volatility US Equity ETF (Ticker: ZLU) can help protect capital, as it did in periods like 2020 where it had a positive return when the market was down double digits. Low volatility can position your portfolio to be more defensive than the dividend factor.

2024 Key Themes

Fixed Income ETFs will continue to be a trend as investors are looking for that efficiency that an ETF structure offers in terms of getting exposure to bonds. Factor based ETFs will probably make a comeback as well. Broad-based ETFs outperformed most Factors, except for Quality last year; we will probably see a reversal as investors use Factors to manage risk as the market slowly shifts throughout the year. Covered Call ETFs will remain popular this year, as well as Structured Outcome ETFs with non-linear payoffs, as investors may want more predictable outcomes. The ETF industry has grown at a high growth rate over the past decade and we will likely see the ETF industry grow at a similar rate going forward.