Opinions
Michael Sprung A Comment -- General Comments From an Expert A Commentary COMMENT Nov 27, 2024
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Tariffs are one thing, and a big thing. But there's lots going on in the market, and tech has been going through a shift since June of last year. Tariffs have accelerated moves in some sectors. But reality is that whether you're looking at semiconductors, the Mag 7, or growth stocks in general, the market's been rotating. So there are headwinds.
At the end of the day, this giant buildout for AI is a big deal. However, the infrastructure that's been built is going to weigh on tech companies for some time; a lot of depreciation will have to be written off. It's possible that there's been some overbuild.
Don't have FOMO (fear of missing out) right now. There's no indication that tech will return to leadership anytime soon. His firm has 0% in tech right now.
He's a big believer in tracking breadth across the market -- which sectors have the highest percentage of stocks performing well? Where is it improving, where is it weakening? When you get into a tough decline almost everything is impacted, and this decline has been similar to that.
The last group to break down was financials. Within that group, P&C insurance companies were strongest, have not broken down, and have done pretty nicely on the bounce over the last couple of weeks. Wherever you look in the world, financials are the best-performing sector aside from precious metals.
We're in an inflationary environment, likely to have a second wave of inflation especially due to tariffs. Financial services companies benefit from an inflationary environment.
Problem with regional banks is they're probably most closely tied to the US domestic economy. When he looks at market signaling, such as what's happened with crude and other commodity prices, there is a risk we are headed to recession.
Regional banks have a lot of real estate exposure, hold a lot of treasury bonds (and that market has not been very friendly), and it was the first group in the financials to break down technically. RSI weakening since November. Don't be a hero.
He's being very cautious right now. Has about 35-45% cash in portfolios, and that's a lot. Precious metals make up 10-15%. Also 10% global, but ex-North America.
Strangely, global stocks are performing better than US stocks, even though global stocks are the target of tariffs. Part of that is because 31% of the MSCI world index is financials.
Holding cash gives you flexibility. It could be one of those times when we get a quick reversal in the market. But his guess is that a lot has changed in the last month in how we look at the world, and it's going to take some time to sort out.
The market's trying to get its head around 2 massive uncertainties. One is tariffs, and the impact they may or may not have on global GDP and, therefore, on global oil demand. A few analysts have cut global oil demand for this year. Some parallels are being drawn between March 2020 and today. Back then we had a demand shock, and now we have a potential demand shock. In March 2020, Saudi Arabia surged production capacity to the maximum.
Today we have the voluntary members of an OPEC deal that has curtailed volumes; they've now announced that they're adding barrels and at an accelerated pace. He thinks this is intended to force greater compliance from OPEC "cheaters" of the agreed-upon lower volumes.
In April, seeing production down by a little, but not yet seeing full compliance. Raises concerns as to what OPEC leadership will do in the next several months, which is the second uncertainty.
Right now, the market's very underexposed to oil. Nobody's bullish, everybody's throwing in the towel. It feels as though we've reached the bottom from a sentiment perspective. He struggles with what's it going to take to see $75-80 oil over the next year. Massive demand uncertainties could change with a single tweet. Overall, feels as though the market could be sloppy for the next year.
There was an opportunity about 2 weeks ago when share prices fell, but the price of oil and FCF did not. Massive disconnect. ATH for example, a big holding of his, bought back 2% of its shares in the month of March; very aggressive. He's also notice insider buying throughout companies.
When the price of oil collapses, a company's priorities to protect are, in order: the business, the balance sheet, dividends, and then share buybacks. The sector average for balance sheets is 0.9x debt to cashflow at $60, which is very strong. Dividend sustainability is $51 with production flat. Any residual free cashflow is going to buying back stock.
He had been leaning more toward there being a cut. But it's not a surprise; bets were about 50/50 whether there'd be a cut or not.
If you look at the comments that came out, there's a wide range of potential outcomes -- from lots of inflation to a recession. In the end, the backward-looking economic data, such as inflation, looks reasonable. But the forward-looking data, like unemployment, doesn't look good at all.
He thought there might be some more weight given to the employment situation, given the uncertainty created by US trade policy. The BOC, consumers, and businesses are all dealing with uncertainty and that forces people to sit on their hands. A bit of relief on the interest rate side might help to provide better economic support.
He thinks so, when you think about what goes on in company boardrooms on capital budgeting. With so much uncertainty, how can you bring up a massive project for approval or invest in more people? Forces everyone to sit on their hands, as there's really nothing you can do. In fact, you're seeing companies go the other way with some layoffs.
Need a lot more certainty before you allocate capital. In the meantime, it's wait and see, which doesn't help the economy.
The #1 question in this scenario is time horizon. If your time horizon is really short, investing in stocks doesn't make sense. If you look at market data, the odds of losing money in the stock market after 5 years is almost 0. So buy things that are undervalued with a time horizon that allows you to stick in there.
This came up more in the past when GIC rates were really high. If you own a GIC outside of a registered plan, that's 50% tax. So your 3% on a GIC is instantly halved to 1%, below the rate of inflation, losing purchasing power. If you have 3-5 years, use this volatility to focus on some great compounders. This can set you up for a very long time if you buy right. In 5-15 years, you can really grow your money, and that's where the GIC argument falls apart. See his Top Picks.
He can't remember two years back to back like this. It's really been exceptional. We had the dotcom boom back in the 1990s, and the real estate boom, but they didn't drive markets anywhere near to what we're seeing today.
Seeing stocks like TSLA with multiples around 170x, and NVDA at 54x or so. It's pretty extraordinary that people are willing to pay that many years forward to acquire an interest in a company.