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THIS WEEK WITH SADIQ

January 17 to 21, 2022

CPI, Earnings Outlook, Value vs. Growth

Weekly Commentary

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CPI Data

Last week the U.S. Bureau of Labor Statistics reported that consumer price index (CPI) was 7% over the past 12 months.1 While this number is exceptionally high, it was widely predicted and should not have come as a surprise to investors. The reading increased the odds of a rate hike in March, with the FedWatch Tool showing an 83% likelihood that the U.S. Federal Reserve will take action.2 Our belief is that we will look back on this quarter as the peak level, the high watermark, after which CPI numbers started to normalize and supply chains opened up. Of course, the change will not happen overnight, but we continue to believe worst is behind us.

Bottom line: As CPI crosses 7%, the Fed must act swiftly to bring inflation under control.

Earnings Outlook

The outlook for corporate earnings is still relatively good, as there were no lockdown measures in place during Q4 2021. It was a productive season and we expect to see strong results, though the story will likely change next quarter when the Omicron impact comes through. Moreover, as we get further into 2022, the year-over-year numbers will start to fade given how strong last year’s numbers were. So, while earnings remain positive – especially with companies who were able to pass on higher costs – the data may appear less impressive moving forward.

Bottom line: The upcoming Q4 results will be the last to benefit from YoY comparisons to 2020.

Value vs. Growth

It’s an open secret that Growth has dominated Value for a significant period of time. And while some analysts jumped on the Value bandwagon last year (as the economy started to look like it was back on track), the reality was we were still in COVID protocols. However, there’s another conduit for the rotation: higher interest rates. Growth names are effectively long duration assets, and therefore don’t do as well in a rising rate environment. We have already seen selling pressure in those areas of the market, with Energy and Financials starting to do really well, but it should be noted that the biggest technology companies will likely have a floor to limit big drawdowns.

Bottom line: Now is the time for a sector rotation from Growth to Value, though mega-cap tech stocks will likely recover from the dip.

Positioning

In previous weeks we discussed specific ways to gain access to the Financials and Energy sectors. However, investors can access more passive exposure to the broad S&P/TSX Index through the BMO Canadian Equity ETF Fund. Although we continue to believe this is a stock-picking environment, the Canadian market has a natural tilt toward the type of value sectors that are positioned to benefit in this environment. Another opportunity for ESG-minded investors is the BMO Women in Leadership Fund, which holds great companies that also embrace diversity and inclusion as a core value and competitive strength.

Bottom line: For passive exposure to Financials and Energy, look for a broad beta Canadian equity fund.

Market Update

  • Equity markets struggled this week amid a heavy wave of hawkish talk from the Federal Reserve.
  • The S&P 500 dipped 0.3%, with strength in energy offset by declines across most other groups.
  • The TSX outperformed, gaining 1.3% thanks to a rebound in oil prices and another upward move in the sector, along with banks.

Disclosures:

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Exchange traded funds are not guaranteed, their values change frequently and past performance may not be repeated.

BMO Mutual Funds are managed by BMO Investments Inc., which is an investment fund manager and a separate legal entity from Bank of Montreal.

Commissions, trailing commissions (if applicable), management fees and expenses all may be associated with mutual fund investments. Please read the ETF facts, fund 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.

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.

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