Opinions
Josef Schachter A Comment -- General Comments From an Expert A Commentary COMMENT May 01, 2018
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Off that April bottom, we've seen probably one of the most dramatic V-bottoms in history. That's telling you that things are starting to get a bit extended. If you look at the CNN Fear & Greed Index, or the NAAIM exposure of almost 100% invested right now, you can see that short-term things are extended.
Markets made a really big push to highs. Now zoom out and look at the longer term, some things have happened that indicate we're setting up for higher markets long term. But there could be chop in the short term. Depends on what type of investor you are. If you're more for the short term, you might want to look at raising some cash. If you're in it for the long haul, you'll probably just sit here and ride out the volatility.
There's so much going on right now, and we've seen a year like no other as far as geopolitical news and tariff talks. Now the focus will probably turn to earnings for Q2. After Q1, a lot of companies didn't provide much for guidance because of the tariffs. So now we'll want to see what the guidance is going forward, and that will let us get a better sense of valuation on the market.
Looking at the market from a historical, rearview perspective, it certainly is expensive right now.
One factor is the timeframe for how long you want to stay invested. You need realistic timeframes, because we saw this past March what volatility can do to markets. He tends to focus on a lot of small- to mid-cap companies, and they can be really volatile both on their stock and on their underlying business.
Know yourself and how you react to making money and to losing money. When a stock's losing money do you follow it down, buy more, or stop yourself out? Need to know that ahead of time so that you don't get emotional in the moment. When you're making money, will you hold and make a lot of money for the duration or will you harvest your gains along the way and reinvest somewhere else?
It's important to know ahead of time what you're going to do, especially with the small- and mid-caps.
Premium contentThere are all sorts of strategies in the stock market, including being a moth that just wants to go to the flame. His firm's strategy is to not be the bullseye. Their idea is to find a great business that everyone's ignoring, and so to find things that are not going to be affected by tariffs. Focusing on the tariffs themselves is just too hard to figure out.
When Trump was elected in November he was already talking about tariffs, so they went through all their companies to see how they'd be affected by tariffs. So far, the one impacted the most is CP Rail. They own it for the long term, can't be replicated, monopoly. It has been hit, but has moved mostly sideways. Looking at the stock action over the last couple of days, it looks as though tariffs are all priced in and the market's looking through that.
A lot of things aren't affected by tariffs. The overall economy might get softer and it looks as though it is, and the consumer might be affected. Will auto manufacturers be affected? Yes, 100%. But they don't affect the earnings from MSFT. In Canada, earnings for a BN would be affected by interest rates and the 10-year bond yield. And the budget is way more important to the 10-year bond yield and how that affects the stock market. Those things are more important than tariffs.
That's why the market has digested tariffs so quickly. They have a specific impact on this little part of the stock market, but not the big picture.
Correct, as we've seen such an extended rally. Valuations are very high, especially in US stocks. People seem to be ignoring potential risks such as tariffs, and rhetoric has accelerated in the last week or so. If you look from January 1 to today, you have more geopolitical risk, earnings estimates coming down, US market continuing to rally. He's a little more positive on Canada.
Investors are being complacent right now, and it's time to be a little bit cautious.
The bond market's really telling us it's concerned about inflation, the US deficit, and tariffs potentially being inflationary. With today's additional tariff rhetoric we've seen bond yields moving up. That's a clear sign that the bond market has one view, and people often find that the bond market is a better gauge than the equity market of what's going on from a macro standpoint.
Equity market's being driven by momentum, retail investors, a lot of hype around AI. AI will definitely be important, but we don't know how profitable companies are going to be from this massive capex investment. A lot of positive news is already built in, and the market's focusing on that and pushing all the negatives aside.
He doesn't typically tend to have a ton of commodities exposure. He owns a bit of gold and a bit of energy, but overall his firm is not a heavy commodity investor. It is the time for defensive businesses with good cashflow generation, and value investing should have a bit of a comeback. He favours Canada over the US right now for equities.
Overview. The DOW is taking another hit today, we are near the year’s low. As the market is moving up and down, it is hitting lower highs and lower lows. 23,300 will be an important point for the Dow. We might hit that very soon, yielding our first major correction since 2009. We are down about 10% for the year but we could hit 20% or 25%. We are having the correction now because: (1) The Federal Reserve is increasing the cost of money, which reduces the value of earnings; (2) The money supply is tightening. The US money supply was growing at a rate of over 7% per year but is now down at 4% under the MZM terminology (see https://en.wikipedia.org/wiki/Money_supply). If you want 3% economic growth and 2% to 3% inflation, you need 5% or 6% money growth or more. The money supply is not growing fast enough and so money is getting tighter and that in turn drives the US dollar higher. (3) The amount of debt that has to be raised is enormous, but the Fed is not buying more and Europe is not buying more, so interest rates are rising. So money is more expensive and tighter. He thinks this is why the market is correcting. He thinks the DOW could go down 3000 over the next three months and he thinks people should be cautious about buying today, and hold onto cash, because there will be great buying opportunities late in Q3 or in Q4. He thinks energy stocks could be caught up in this.