Opinions
Stockchase Insights A Comment -- General Comments From an Expert A Commentary COMMENT Jan 15, 2025
You might be interested:
- Oaktree Capital Group (OAK-N)
- Teekay Shipping Corp. (TK-N)
- Boeing (BA-N)
- Hasbro Inc (HAS-Q)
- Hewlett-Packard Co (HPQ-N)
- Target Corp (TGT-N)
- H&R Block (HRB-N)
- Dollar General Corp. (DG-N)
- Ford Motor (F-N)
- JP Morgan Chase & Co (JPM-N)
- Advanced Micro Devices (AMD-Q)
- Carvana (CVNA-N)
- Pitney Bowes (PBI-N)
- Roots (ROOT-T)
- Gap (GPS-N)
These past 6 weeks remind him of a quote from Lenin: "There are decades when nothing happens, and then weeks when decades happen." Between tariff announcements and then reversals, and sudden intraday shocks and moves in the stock market and in currencies, it's been an extremely volatile time. It's very cloudy and confusing. His ETF research desk has been inundated with questions.
On the whole, he's not seeing the market retrench entirely out of equities. Money flows are split almost evenly between fixed income and equities. 2024 was a year of bull markets all the way, a record year for ETF flows both in Canada and in the US, driven mainly by demand for the Mag 7 and the S&P 500.
There's still a lingering desire and wish for those growth stocks to continue driving as the engine for the economy. But we're starting to see branches of flows moving into low volatility equities and certain aspects of fixed income, as well as buffers and other strategies for capital preservation.
They're highly efficient, giving you incredibly diversified exposure to sometimes thousands of stocks all at once. Enormous liquidity. Market makers stand ready throughout the day to execute huge orders. Primary and favoured vehicle for large institutions that want to turn over billions of dollars on a dime.
Incredibly low fees and very tight spreads benefit investors as a whole. Smaller investors can piggyback onto this world-class institutional liquidity built around the ETF ecosystem. People who've just sold their stocks often move into ETFs so that they can maintain some type of market exposure.
Definitely could get worse. We're seeing the early effects of a once in a thousand years president of the US and all its repercussions.
If you look at Q1 numbers for US companies and what they were projecting for the second half of the year, auto companies all pulled guidance. Same thing with the airlines. Other companies, while not pulling guidance, have said it's really murky for the second half.
We're slowly seeing the US walk back on all the extreme reciprocal tariffs that they announced on "liberation day". Now we're getting discussions with other countries such as the UK and China. That leaves about 193 countries to go. A long road, but going in the right direction.
From here we should, hopefully, see some stability in the markets.
Critical thing is going to be what the impact is for the consumer. There's going to be a pass-through of tariffs, and it depends on who bears the brunt -- manufacturer, importer, or consumer. Inflation's going to be coming through. Layoffs may tick up.
Then it's up to the Fed whether to tolerate the inflation as a one-off, or to focus on labour, when it decides whether to guide down or not. Jerome Powell really differentiates between his role and that of the government; he sees it as his job to ensure full employment with inflation around 2%. He's not anticipating, but is waiting for hard data, and it's difficult with tariffs in flux. To lower rates now would be putting fuel on the fire, exactly what you don't want.
People will change their stripes as they get affected by different things. Current US president is blowing everything up from defunding research to challenging universities.
His firm hasn't changed its approach. They look at everything from a bottom-up perspective. They have target prices on all stocks in a concentrated portfolio of 32-33 names. They also have target position sizes; if a stock drops, the team debates whether to buy it up to a full position. The macro is changing; but their method remains consistent, and that's served them well through current and past crises.
Upcoming mid-term elections plus lawsuits challenging tariffs should work in investors' favour. We have to hope that rules will fall into place and we can all move forward.
Headlines will have a minimal impact, because it takes YEARS to negotiate a trade deal. Trump will reduce tariffs on China to 80%--still high. And America dealing with 10% tariffs: that's still a big deal because our economy was still slowing. Don't buy false comfort ahead of the trade talks. Near term, we're okay, but he expects a recession ahead.
The problem calling recessions: All data are backward-looking
To call a recession, economists need to look at the data they have in hand. Sure, data points such as consumer confidence are more leading indicators, but all the actual data that economists use tend to be in the past. With recessions and with investments, past performance is no guarantee of the future. The impact of backward-looking data tend to drive a “bad news is good news” mentality at times. Essentially, when all the news is bad it can be a very good time for investors to start buying. That’s because, simply, when you are at the bottom there is nowhere to go but up. When the data are so bad and sentiment is so horrible any good news can have an amplified positive impact. This of course is hard to call, but it is important to remember that once a recession is officially called, it is often already over.
Unlock Premium - Try 5i Free
What Type of Investor Are You?
Willingness to accept risk
An investor's willingness to accept risk relates to whether they are a risk-seeking individual or not. This piece caters more to the psychological side of things such as how much volatility they can withstand and what kind of returns they expect. It also looks at what an investor wants to get out of their portfolio.
Ability to accept risk
This piece focuses more on the facts of one's financial situation and less on the qualitative side. This looks at items like age, knowledge/experience, portfolio size, employment status and salary. Someone who is more able to accept risk is someone who is young, gainfully employed, understands investing and has a large portfolio to begin with.
Willing versus Able
Of course, just because someone is able to accept risk does not mean they are willing. You could be a conservative natured person but have a large portfolio. So the two items do not always align and this can cause problems.
Typically, the more conservative outcome of willingness or ability trumps the other. A lot of investing comes down to psychology and if you are not comfortable with your asset allocation (i.e. willing), you will make the wrong decisions at the wrong time no matter how wealthy or young you are. However, just because you may think you are willing to take on a lot of risk, if your portfolio is too small, you literally might not be able to take those risks that you want to! So again, generally, the more conservative result of risk willingness and ability wins out.
Once an investor has an understanding of these factors, they can then determine what investor type they are (balanced, income, conservative, etc.). From here, you can then determine how to actually structure a portfolio that matches your investment style.
Understanding yourself and your goals should really be the first step when building a portfolio. While we cannot know the ins and outs of your situation like an advisor can, this questionnaire offers a good starting point for an investor to think deeper about their investor type. Finally, if your advisor has not done some kind of questionnaire that is at least as rigorous as the one we provide, they are probably not doing their job!
Unlock Premium - Try 5i Free