Biden pulls out. What next?

On Sunday, U.S. President Joe Biden officially pulled out of November’s election. In our view, this appears to have been the right move strategically for Democrats—Biden was polling poorly post-debate—but it may be too little, too late. Biden’s endorsement of Vice President Kamala Harris makes her the leading candidate for the nomination, and she likely represents Democrats’ best chance to improve their standing in polls. Donations coming into Harris’ campaign after the announcement—almost $50 million in only a few hours—support this view, demonstrating that Democratic supporters are energized by the change (though it is not yet official). That said, we still view Donald Trump as the odds-on favourite in November given how late in the election cycle the switch was made. It does improve the Democrats’ chances, however, and no scenario should be ruled out. Early market reaction to the announcement has been positive; indications are that the retreat we saw last week—particular in Technology (more on this below)—appears to be reversing today. This is a dynamic situation that is still unfolding, and I will have more to say on it in the coming days and weeks.

Recent volatility in Tech stocks—including last week’s slump—appears to be related to concerns around semiconductors and a potential chip war between the United States and China. Why is this making the market so nervous? Before last week, we’d seen an enormous run-up in the chip-related names, especially those focused on artificial intelligence (AI). Thus far, their story has been virtually flawless, and demand is clearly there. But is there cause for concern on the supply side? Our portfolio managers recently went to China to investigate that very question, and they discovered that everything looked good—there’s little reason to think that the key companies will have trouble acquiring the chips they need. The one issue that emerged more forcefully last week relates to Taiwan and the potential escalation of trade tensions between the U.S. and China under a Trump administration; in an interview with Bloomberg, Trump suggested that Taiwan should pay the U.S. for its defense, causing shares of the Taiwan Semiconductor Manufacturing Company (TSMC) to fall. With Tech stocks having encountered so few speedbumps, it’s not surprising that a slight shock would temporarily destabilize the market. Some investors are viewing the situation as a delay in earnings. You can think of this two ways: either multiples need to come down, meaning the stocks are overpriced, or since the risk is not demand-related, it means getting the same Tech names at a discount. We lean towards the latter as these are long-term themes we want to own. Our expectation is that more volatility is likely as the U.S. presidential election approaches, especially given the shakeup on the Democratic ticket and the fact that Trump’s VP pick, J.D. Vance, is aligned with him on trade issues. That said, in our view, the on-the-ground fundamentals for Tech and AI remain strong.

Last month, the Organization of Petroleum Exporting Countries (OPEC) decided to boost oil production, prompting questions about the outlook for crude prices. Our expectation is that OPEC is likely to continue to increase supply to the marketplace because they had restricted it for so long. Prices have risen enough that they can afford a pullback, and the recession that was expected—and which probably played a role in their forecast—never arrived. There is also internal pressure to raise supply in many of the OPEC member states so that they can capture greater revenue. From OPEC’s perspective, you can ask countries to cut supply for a period of time, but not indefinitely. Overall, our outlook hasn’t changed significantly—we view $80-$90 per barrel as the sweet spot based on supply and demand, and barring a significant political shock, we expect trading in that range to continue.

The Bank of Canada (BoC) meets again this week, and the numbers appear to be aligned for another interest rate cut. Data shows that there’s softness in the consumer and softness in economic growth. Combined with a decline in housing prices, that’s likely to affect consumer confidence, which will ultimately impact spending. Overall, inflation is still heading in the right direction despite one or two differing data points. The U.S. Federal Reserve (Fed) also appears likely to cut rates in September, which helps; the BoC tends not to stray too far from the Fed, and lower U.S. inflation data will have an impact on Canadian prices. In recent months, we’ve discussed consumer spending extensively in this space, especially the shift from Consumer Discretionary to Consumer Staples. This month, we saw higher consumer spending, yet two luxury brands (Hugo Boss and LVMH) provided lower guidance. This means that even the high-end consumer may be cutting into their excess savings. If that’s the dynamic in the U.S. and globally, it will have implications for the consumer in Canada as well.

For a detailed breakdown of our portfolio positioning, check out the latest BMO GAM House View Report, titled Politics and profits: Finding wins in an election year.