Opinions
Josef Schachter A Comment -- General Comments From an Expert A Commentary COMMENT Sep 07, 2018
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As a technician he expected this, but you never know what's going to trigger it. It was sort of pre-ordained with the setup through August and September, and then we usually get a low in early October and one late October. Today, the driver is an announcement from a politician.
Thinks this correction will be well bid. So on any weakness, whatever the source (an announcement, bad economic news, geopolitical event), investors are probably going to step back in. Just as in April, the market will probably absorb this and move on, knowing that we're in a period of expected weakness anyway.
We'll need to wait a few more weeks, but we'll probably go through this quickly.
Technicals are very binary and clinical. So the setup is always there, but you don't know what the story is behind them. Trump is a bit of a wild card. But the underlying strength in the market (such as shown by the jobs numbers) means that investors are ready to buy on any weakness.
We've seen this a lot more with the Fed, where they're between a rock and a hard place. It was the last central bank to cut rates. The reason they dragged their feet, unlike Canada (which was one of the first of the G7 to lower rates), was concern that underlying strength of the US economy could come back to bite them.
In Canada, we may be less apt to lower if we see jobs continue to do well and GDP pick back up. If GDP starts to have some upward momentum, it'll put both central banks in a bit of a fix and we may not get those lower rates.
Looks good as a longer-term play, but it can be quite volatile. His team is now looking at positions and, for those that have done really well, deciding which ones to clip a bit to bring the position size back in line. Yesterday's pattern suggests further weakness to come, but it's not guaranteed.
We've seen ups and downs on the trade front since April, so it's hard not to look to that prior playbook and say that we're probably going to come up with some kind of solution. Natural to get volatility in periods like this, especially after hitting so many record highs over the last number of months. The S&P is almost positive again today, so things are settling out. Expectations that agreements will be reached on a lot of issues that are at the forefront.
When you strip all that headline risk away, we're left with quite a healthy market. Earnings growth continues to accelerate. Jobs market is OK. Interest rates seem to be stabilizing and coming down. That sets up really well into the end of the year, and especially into Q1 of next year.
He is seeing some of them revive, but there's still a plethora of opportunities there. His firm spends a big chunk of time on small- and mid-caps. This environment sets up really well for the other 493 of the S&P 500. He's had no trouble finding undervalued names in both Canada and the US with lots of catalysts, including growth tailwinds and a stabilizing interest rate environment.
He also like high-quality equities. In Canada, the high-quality factor has had a pretty weak few quarters. So there are a lot of opportunities there.
We're seeing contract after contract. Maybe there's overbuilding there, but it's too early to say. Earnings growth has been quite robust in that sector. It's not something his team is afraid to be involved in via the NASDAQ, certain Canadian equities, or utilities and natural gas.
It's going to create a large tailwind, and there are many areas of the market you can get involved in. He's not chasing some of the big momentum names. Capex spending is real; it'll impact earnings growth in a positive way and should be good for the market as a whole.
We have a great industry for Canadian banks. Outlook in Canada is a bit rosier than it was 6 or 12 months ago. Some of the provisions for credit losses have started to come in, investment banking has picked up, lots of levers to pull to earn more capital. Expects all that to continue for the rest of the year. He'd continue to hold the banks.
Typically, if you buy the Canadian bank trading at the lowest multiple it will revert to the mean of all the banks. BNS is in that bucket right now as a relative underperformer.
His firm has a 5-10% weight in gold at the moment, depending on the risk tolerance of a client. Most of it is just owning GLD, but at a level certainly no more than 10%. For good portfolio management, you want more than just 3-4 names. You won't get hurt holding GLD, but individual mining names have run up and are primed to have some $$ taken off the table. Wouldn't be surprising for some bit of news over the next couple of months to knock the gold rally for a loop.
If you've held this sector since the beginning of the year, you're now in a really good position to rebalance. He's really bullish on the USD, so you could add some US exposure. If you're just starting out, stick to large ETFs.
Market. He thinks oil is likely to break below $60 soon. Inventories of gasoline and distillates continues to rise and now we are heading into the end of the gasoline driving season in the US. He expects US demand to drop by 1.0-1.5 million barrels per day as a result. OPEC production continue to increase despite about 150,000 barrel per day decline out of Iran. He expects the TSX Energy index to drop to 160 from 187 today. Trans Mountain pipeline delays, LNG uncertainty and service industry stock hits are all setting things up for a “table pounding” buy opportunity soon – likely in November and December during tax loss selling season. He thinks they will have over 20 companies on their recommended buy list during that time. He prefers natural gas stocks ahead of an expected LNG announcement.