Josef Schachter A Comment -- General Comments From an Expert A Commentary COMMENT May 01, 2018

In the US, everybody expects a minimum 25 bps cut if not 50 bps. Canada started cutting early, perhaps being the first G7 to cut. He's not sure if we'll keep suit, but we have cover now to keep going along with the US. 

It puts them in a bit of a bind with where we are in the economic picture right now. Some things are softening and supporting expectations of rate cuts, but we're also seeing some inflationary pressures start to build again. The Fed is notoriously late on things, but he thinks Powell is trying to be prudent right now. Thinks the Fed would rather wait, but the clarion sound is so shrill right now, they feel they have to cut.

This all started right after the US election with the threat of tariffs coming. Then early in February, he was looking at the futures, particularly the FX, and the CAD was just getting crushed. The CAD went on to recover.

With the tariff announcements, the prognostications were that we'd be in big trouble. That whole narrative got unwound. So all those people who were worried about it are coming in late to the market. If we look at the structure of the market right now, this is not the best time. Lots of technicals signalling caution -- September/October is historically weak, some indicators are at overbought.

This piling in is missing out on some of the returns we've seen since April and is trying to push in at the last minute.

That said, there's some sort of corrective environment in the offing. Whatever the nature of it is or how long, it's going to be bid at the lows and right after that.

Most of his portfolios are fully invested right now. He has no choice but to follow the firm's rules. So in the seasonal portfolio, it's 30% bonds -- they get in late summer and sell early October, as a routine every year. In the last few days, that bond position has done quite well. 

After 30 years in the business, there are some areas he just avoids because they never seem to make money. Transportation is one, with too many variables that make a positive return challenging. Airlines. Car makers, though modern car makers like TSLA and RIVN are a different kettle of fish, as they're changing the structure of the business.

The shift from active to passive ETFs has been driven by reduce market efficiency and price discovery (i.e. Tesla's inflated PE), increase market concentration and volatility, and growing correlation and systemic risk. Active funds have lagged the benchmark, with 79% of these funds lagging over 3 years in the U.S., or 96% lagging over 10 year in Canada or 91% lagging over 5 years in Europe. Also, the median MER of mutual funds in 0.8% vs. 0.3% for ETFs and nearly 0% for the SPDR ETF. As we see society age and more reach age 65, more will demand fixed income assets away from growth investing. This is a serious shift, one that is potentially more tax-efficient. This shift is mostly driven by demographics. We have hit the bottom in terms of ETF cost.

Central banks will announce their interest rate moves soon. Canada is seeing a weaker economy with significant job losses recently. The BOC will likely cut 0.25%. The U.S. will cut 0.25%  twice this year, is what the market is pricing. This will depend on economic data. Cutting by 0.5% at once is silly and looking like it is bowing to political pressure. A 0.5% total cut this year is unlikely. Those who say the Fed is already behind, then the Fed should cut 1.00-1.5%, because we're going into a recession. The Fed doesn't have enough info to make the 0.5% cut now. The U.S. labour market has slowed dramatic, not mass layoffs, but hiring has slowed a lot. How will Powell answer questions about political interference. Watch for that.

Investing Psychology 101: Anchoring Bias

The anchoring bias is when an investor uses their information from a previous experience with a stock as a reference point for any future data. An example of this is if an investor had the opportunity to buy Stock A at $100 one year ago but did not act upon it and currently the stock price is $300. That investor, now seeing that the price has tripled, may only wish to buy Stock A close to a price of $100, as that is when they first could have bought it. The investor might feel that a share price of $300 is too expensive and that the stock price should come down to $100, however, the investors’ previous experiences are irrelevant to the share price as the company has likely continued to grow and generate revenue and become a more profitable and valuable company.
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They are still bullish on US stocks and the continuation of the cyclical bull market. There are two drivers. One is the AI investment cycle where demand is outpacing supply. Data from second quarter earnings show strong demand for industrial building centres. Technology will be transformational to the economy. Also with little indication of rising inflation the expectation is that the feds will cut rates 25 to 50 basis points. The US economy is deteriorating somewhat. Globally we're in a rate cutting cycle.

There were no past picks so he focused on health care in general and specifically. The space has been beaten down with a lot of unloved stocks. There is a hangover from the strong demand during Covid. The Trump administration is making changes on the regulatory front and meaningful reforms. It is a defensive space so there is better growth elsewhere in a bull market, so people move money out of it. 

UNH is affected by the sector. There is cost inflation on the medical device side so stability has gone down. The aging population is a tailwind but at a greater cost to the system.

Regarding Merk if you want to make a certain amount on drugs, a lot will disappear because of drugs coming off patent. He hopes they have more M&A deals or innovate internally. Innovation is positive for the industry. They will still have some valuable assets left when the regulatory picture clears.

For markets to keep making new highs, there needs to be multiple expansion or earnings growth. This applies especially to the Mag 7. Growth can continue if AI create efficiency gains in business. He can't call a correction. Canadian investors have put behind them Trump's trade war, though we may be a little ahead of ourselves. He avoids resources--they do well only in bull markets such as now, but we always know how it ends. He sees value in industrials and specialty finances.