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THIS WEEK WITH SADIQ

Taiwan, Tech Earnings, Jobs

August 8 to 12, 2022

Weekly Commentary

Taiwan

Rising tensions in Taiwan have been in the news, and investors may be asking what this could mean for their portfolios—is another Russia-Ukraine type crisis on the horizon? U.S. House Speaker Nancy Pelosi’s recent visit to the island raised the temperature and prompted speculation that the situation could escalate further. But our evaluation is that while the risk factor isn’t zero, it’s unlikely that China will take significant aggressive action in the near future, though some limited action is expected. China’s economy is on the brink of taking off as COVID recedes into the background; the last thing it needs is sanctions from the U.S. or new tariffs proposed by opportunistic U.S. politicians jockeying for position ahead of November’s midterm elections. Either of these could hinder an economic rebound. Some sabre-rattling across the Taiwan Strait is likely. But even in the long-term, the probability of a full-scale conflict akin to Russia-Ukraine is low, as China simply has too much to lose economically.

Bottom Line: As opposed to what occurred in Russia, risings tensions in Taiwan are unlikely to result in a full-scale military conflict.

Tech Earnings

Recent earnings reports in the tech sector have been quite strong—better than anticipated, in fact—despite layoffs at some high-profile companies. Expectations for future growth were high at firms like Wealthsimple and Robinhood, but that dynamic has changed and, as such, they are scaling back expenses including jobs. What was perplexing is that relatively few CEOs commented on how inflation will impact their next quarter—we didn’t hear much in the way of statements like, “the quarter was strong, but we did see some inflationary pressure creeping in and that may be a cause for concern over the next few months.” With inflation remaining as hot as it is, why is that? It could be that the impacts of inflation and a weakening consumer haven’t been felt yet, which raises questions going forward. Market sentiment is swinging back to being more positive, driven by the possibility of fewer interest rate hikes by the Fed and improving inflation numbers. That could cause markets to move higher in the near term. But those positive signs may be a mirage. Any cooling of inflation is probably linked to energy prices coming off, which could be temporary. And if the effects of inflation and other headwinds haven’t yet come through, they may impact next quarter’s earnings and result in a tough September and October.

Bottom Line: Markets may push higher before ultimately going another leg lower in the Fall.

Jobs

The employment picture continues to look fairly strong—unemployment is low and there are still lots of jobs available. But overall, the situation is not as good as it was a month ago: job numbers are starting to creep downward; some vacancies will not be filled because of hiring freezes; and sometimes the same position is advertised across multiple regions, giving analysts an inaccurate impression of the employment market. So, while the situation is certainly not bad, these indicators all point towards a slowdown in job creation. We’ll be following this potential trend closely. If it proves to have legs, that could have repercussions for the consumer and increase the probability of a recession.

Bottom Line: Job creation is decelerating, which could increase the chance of an economic slowdown—but it’s unlikely that it would be long-lasting.

Positioning

We’re just conducted our monthly review of our portfolios, and from a positioning standpoint, not much has changed. One topic of discussion was the resilience of the market. We asked ourselves if we’re missing any opportunities, and ultimately, we concluded that we’re not. The risks that we’ve been discussing for months—inflation, rising interest rates, geopolitical instability, and so on—are all still in play. If markets do go much higher, we’ll participate with our current positioning. But if markets sell off, as we’re expecting, our positions are likely to do a good job protecting our portfolios. That’s why we’re remaining underweight equities at this time.

As Chief Investment Officer, Sadiq S. Adatia’s views directly influence the BMO ETF Portfolios.

Market Update

  • Equity markets were mixed this week, as last week’s post-FOMC rally carried over, but eventually ran into the reality of continued tightening.
  • The S&P 500 added 0.4% when all was said and done, and is now down 13% on the year after a strong bounce off the June lows.
  • Consumer discretionary, technology and telecom services posted modest gains, while energy was hammered almost 7% alongside a drop in WTI prices to below $88 at one point. Don't overlook the importance of oil prices here, as weakness helps the inflation backdrop immensely, and non-energy stocks have rallied on any price declines.

Thank you for reading!


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