Strategy & Insights

Since the end of last year, our preferred gauge of the trade-weighted U.S. dollar (USD) has declined by several percent. This runs contrary to what you would normally expect as U.S. tariffs should (in theory) lead to a higher valuation for the dollar. However, theory doesn’t necessarily equate to practice – and the greenback’s decline speaks to a change in structural factors that we don’t see dissipating any time soon barring a substantial pivot in U.S. trade and foreign policy.

But before we delve into our rationale, we need to distinguish between the valuation of the U.S. dollar and its reserve currency status. What we are saying is that there is more room for the U.S. dollar to fall. We are not saying that the U.S. dollar will lose its reserve currency status. Instead, we are likely in the antechamber of a more balkanized world of reserve currencies, with the U.S. dollar remaining in the pole position.

For the week of March 3-7 markets reacted negatively after President Trump imposed tariffs on Mexico and Canada igniting fears of prolonged trade war. These are the top-performing BMO ETFs that proved resilient in one of the steepest drawdowns so far this year.

As we update our quarterly portfolio strategy, we’re reminded of an important lesson that often must be re-learned. Namely, that markets are terrible at forecasting non-linear events.

To wit, we are preparing this edition just ahead of the ​“America First Trade Policy” memorandum is scheduled to be released. That release is expected to recommend additional country-specific tariffs to be implemented based on the principle of reciprocity and other non-tariff barriers. 

Additionally, tariff exemptions on USMCA-compliant imports from Canada and Mexico are set to expire on April 2^nd while the threat of sector-specific damage on autos, semiconductors and pharmaceuticals still looms large.

Given the backdrop, the priority for our fixed income portfolio is to focus on strong credit and to optimize yield at a shorter duration.

In the U.S., data that tracks the real economy appears to be slowing, but we don’t get the sense that the Federal Reserve is in any hurry to ease policy rates. That’s largely due to the potential from ​‘stickier’ consumer prices as tariffs start to make their presence felt.

Since the beginning of 2024, the spot price for Gold has risen by near 40%. That is quite the feat considering that most central banks had stopped hiking rates last year, and the availability of higher yielding instruments should have meant that a ​‘zero yielding asset’ such as a precious metal should have consolidated at the very least.

Nevertheless, we’re not here to diagnose what led to these remarkable gains. Instead, our focus for this note — which also dovetails nicely with the one-year anniversary of the launch of the BMO Gold Bullion ETF (Ticker: ZGLD) — is to examine whether or not we should expect to see further upside from here. And after careful thought and deliberation, we identify three reasons for optimism as well as one important risk to monitor.

As each day passes, we grow ever more concerned that tariffs are becoming a more mainstream concept at all government levels in the United States.

Indeed, there is a compelling reason for Republicans in both chambers of Congress to consider tariffs to solve an important problem. Namely, that the ability to extend tax cuts while trimming the bloated budget deficit looks increasingly untenable without tariff-related revenues.

In this note, we’ll quickly rehash the current state of affairs when it comes to the budget resolution process that is underway in both the House of Representatives and the Senate. Then we’ll go over why it may become difficult to extricate tariffs from tax cuts over the coming months – even if there are additional tariff delays from the White House. Finally, we offer three takeaways for our readers as well as ideas to take advantage of an environment where tariffs become a more permanent fixture.

In the markets, the theme of ‘American exceptionalism’ has received a lot of air play of late – and for good reason. Over the past two years, the benchmark S&P 500 has increased by at least 25%. In fact, since the end of 2018, the index is up by close to 160% with an average annual return of 18.6%. With all due respect to the other large developed markets, it’s only in the U.S. where an investor could have hoped to sniff numbers like that.

And to be sure, investors have been voting with their feet. More than any other time in modern history, the U.S. market is benefitting from an influx of foreign capital. The impact has been profound, with market valuations now at levels comparable to the throes of the Covid-19 shock as well as the ‘tech bubble’ at the turn of the century. Within leading global equity indices, the U.S. accounts for almost 70% of the weight—well over double where things stood a few decades ago.

One of the more important themes over the past several months has been the sell-off in the long-end across numerous jurisdictions.

Of course, this theme has been led by a combination of macro and idiosyncratic factors – the latter of which has resulted in considerable spillover effects.

All prices, returns and portfolio weights are as of market close on September 30, 2024, unless otherwise indicated.