Back in the Summer of '24

After weeks of writing that the summer is boring and generally lacks developments, life decided to do what it does best and give us many surprises all at once. The NASDAQ experienced a 300 point sell off this week, as the Dow closed down more than 500 points on Thursday; markets have been stellar this year but we want to make sense of everything that happened this week.

Elections 2024

The trading week began with developments from the weekend, as a lone gunman attempted to shoot former President Trump during a rally in Pennsylvania. While there are no direct market implications from this event, traders seemed to have priced in higher odds of Mr Trump being elected in November as the shares of companies in the renewables space plummeted while more defensive sectors like healthcare and telecommunications registered positive weeks so far.

The other frontrunner for the November elections, current President Joe Biden, has had a difficult week in his own right. Several high profile Democratic party leaders have suggested that he bow of out of the Presidential race. As the rumors keep growing that the President will no longer seek the nomination from the party, we ask what the market implications would be if this would happen. If there’s one thing markets do not like, it is uncertainty and with a sitting President who is on his way out, several sectors could be stuck in limbo until we have further clarity on the direction of policy. The only catalyst that would impact markets from here is the start of rate cuts; which seems increasingly likely at this point.

Earnings

Semiconductor stocks had a difficult week as ASML reported their quarterly earnings; they exceeded expectations for Q2, lowered their guidance for Q3 but maintained their figures for fiscal year 2024. Shares were down 12%, their worst day since March 2020 not because of their results but due to the news that the White House was considering stricter export restrictions on China with regards to semiconductor equipment. With all this policy uncertainty, however, you do not know how much value to place on this story (even if traders have already priced in the worst outcome). All semi stocks are headed towards finishing the week lower than they started.

Netflix also reported this week, exceeding analysts expectations regarding user growth, announcing that they would phase out the lowest priced membership tier, providing an update on their live sports ambitions (they scored the rights to air the two NFL Christmas games) and announcing pilot projects regarding advertisements. They disappointed on free cash flow likely due to an elevated content spend for the quarter; users should benefit from this as Netflix studios continue to churn out success after success. Their ambitions from here? To quote CEO Ted Sarandos “..us and YouTube represent about 50% of all streaming to the TV in the US….so really what we’re focused on here is focusing ourselves on that other 8% of total TV time that isn’t going to either us or YouTube”.

Software Glitch

Cybersecurity firm CrowdStrike is responsible for a major outage on Microsoft platforms after a technical update caused a global tech outage impacting air travel, banks, logistics and other sectors of the global economy. While CrowdStrike announced a fix, the event will likely prompt conversations around industry concentration and how the interconnectedness of everything is a sizable vulnerability. Shares of CrowdStrike were down 20% in the premarket (12% as of this writing) as this event is a PR nightmare for the firm which has rapidly become one of the most trusted and contracted cyber security providers in the world.

This event highlights our dependence on the IT providers of the world. I often tell clients that although the shares of these firms may be a little more volatile than average, they are the true blue chip ideas today. Low volatility names such as Johnson and Johnson or Home Depot are systemically important but they could stop functioning tomorrow and the world would be just fine; if Excel crashes or IOS experiences a bug, we would be facing disruptions in the same way as we are today.

Interest Rates and Inflation

Fed Chair Jerome Powell, San Francisco Fed President Mary Daly, Chicago Fed President Austan Goolsbee and Fed Governor Christopher Waller all gave commentary this week suggesting that the Federal Reserve is gearing up for its first rate cut since they began to raise interest rates in 2022. A combination of falling inflation and softening labour market data are behind this development and while the exact timing of the first cut is uncertain, there is a high probability that we see a decrease in interest rates between now and September.

We’re not central bankers, however, we have been calling for rate cuts since the beginning of the year, for two reasons: we believe that most of today’s inflationary pressures are not related to excess demand (weather impacting food production for example, has nothing to do with the level of interest rates) and there are signs that the economy is already slowing down. As history has demonstrated before, once the economy decelerates, it is very difficult to prop it back up with rate cuts. Considering the impressive job they’ve done battling inflation, perhaps they will get it right again with the timing of the rate cuts.

In Summary

A lot to digest this week and even more to figure out in the months ahead; as we stated previously, we’ve had a strong year so far but things can change rapidly. At this point, we have developments without clear outcomes; there are no major changes on our end, however, we are even more attentive with what happens next.

Healthy Distraction

Continuing with our interpretation of the week’s many events, here are just a few little tidbits for the weekend:

Continental Soccer (Football) Tournaments

Congratulations to the Spanish and Argentinian national teams for winning their continental tournaments on Sunday. A special shoutout to Team Canada who finished fourth in the tournament, the best showing ever for the country.

Nostalgia 2024

It was a little weird watching Hulk Hogan, an icon from the 80ies and 90ies speaking at the RNC convention; I wish that these events did not give out the same vibes as Pee-wee's Playhouse. For a healthier dose of nostalgia, Netflix recently released a new season of Cobra Kai; a follow up of the hit 80ies film series the Karate Kid.

Sad departure

The Laval team is losing a gem, as it was announced this week that our assistant market leader Philippe Henri will be leaving us. His new colleagues and future clients are lucky to be gaining such an effective and positive person in their lives; we will certainly miss you! Thank you for all that you did behind the scenes to make our clients’ experiences that much better and thank you for always commenting on the songs used in the titles of our Wrap Up. All the best sir!

The opinions, estimates and projections contained herein are those of the author as of the date hereof and are subject to change without notice and may not reflect those of BMO Nesbitt Burns Inc. ("BMO NBI"). Every effort has been made to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions that are accurate and complete. Information may be available to BMO NBI or its affiliates that is not reflected herein. However, neither the author nor BMO NBI makes any representation or warranty, express or implied, in respect thereof, takes any responsibility for any errors or omissions which may be contained herein or accepts any liability whatsoever for any loss arising from any use of or reliance on this report or its contents. This report is not to be construed as an offer to sell or a solicitation for or an offer to buy any securities. BMO NBI, its affiliates and/or their respective officers, directors or employees may from time to time acquire, hold or sell securities mentioned herein as principal or agent. BMO NBI -will buy from or sell to customers securities of issuers mentioned herein on a principal basis. BMO NBI, its affiliates, officers, directors or employees may have a long or short position in the securities discussed herein, related securities or in options, futures or other derivative instruments based thereon. BMO NBI or its affiliates may act as financial advisor and/or underwriter for the issuers mentioned herein and may receive remuneration for same. A significant lending relationship may exist between Bank of Montreal, or its affiliates, and certain of the issuers mentioned herein. BMO NBI is a wholly owned subsidiary of Bank of Montreal. Any U.S. person wishing to effect transactions in any security discussed herein should do so through BMO Nesbitt Burns Corp. Member-Canadian Investor Protection Fund.