Brianne Gardner A Comment -- General Comments From an Expert A Commentary HOLD Aug 19, 2024

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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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.

Yes. The Fed is always late; that's not a fault, it's the result of the process. Only the history books will tell us whether they've been too late. Too late means that they don't act until there's an event that they could have prevented if they'd acted earlier.

He can't see any indications showing that the US economy is in the path of harm. But these things can happen fairly quickly. There's no question that the labour markets are weakening, but "weakening" is a lot different from "weak". Fed Chair Powell has been very fond of saying that they're "data dependent". They have to wait until they see something before they act, can't just act on an idea.

It's a serious issue, they have to be measured, and they're doing that.

He expects 25 bps. Could easily do 50, but that might send the wrong message. If the market senses that the Fed is lowing rates because they're fearful of a weak economy, it will react very poorly. The Fed doesn't want to upset the markets, they want to be benign as they relate to the market.

It's not a very well hidden fact that this is just the start. He fully expects that before this cycle is finished, we'll see at least 100 bps drop in rates (even if that moves into 2026). 

It'll be interesting to see how the markets do react to this afternoon's press conference. It's not the 25 bps that markets will react to. He's waiting to see if the tone is dovish or hawkish, how many dissents on the board there are, and how many board members would have actually preferred 50 bps. He'll be watching how the market grapples with the message from the written side (decision itself, dissents, dot plots) and from the nuances (how Powell answers questions).

It's all become highly politicized. Well known that President Trump wants to see rates fall, and he's populating the Fed with "his choices". This isn't new. We can go back to the times of Nixon and Ford to see examples of the many presidents who have pressured the Fed to move in a certain way, and who would appoint people to do their bidding for them. It hasn't always worked out so well.

He's in favour of the Fed remaining as independent as possible. But he also understands the reality of the politics surrounding the Federal Reserve.

He particularly likes the infrastructure space, so he'd look at industrials that are involved in that area. He owns URI, EME, RTX, and ETN.

In terms of quality, hard to argue against JPM -- best of breed. GS is tops on the investment banking side. If you're looking at valuation and opportunity, Citi would be a very good choice.

In the middle you have money-centre banks like WFC. BAC is also mid-tier. It's not as inexpensive as Citi, and doesn't have quite the pedigree of JPM, but positioned well to do very good things on earnings with a steepening of the yield curve.

He's overweight the banks, and has been for quite some time in anticipation of what's coming this afternoon from the Fed. The whole idea of investing is to get ahead of the money flow and not chase it.

Most product that retailers carry comes from a foreign jurisdiction. The reason is that we've gone through a couple of decades of globalization, where it was cheaper to produce in those foreign jurisdictions and so the model worked.

We're reversing that, but not doing it over a couple of decades. We're reversing it over a very short period of time. Ultimately, these tariffs have to be paid for by someone. Even though some companies might say they'll absorb them, the pressure will be relentless for them to pass them on to the customer. It's just a matter of how and when so there's the least amount of damage to their brand, company, and stock.