Mike Archibald A Comment -- General Comments From an Expert A Commentary COMMENT Jul 06, 2022

It's remarkable. If you asked someone 3 months ago whether trade wars and unexpected conflict in the Middle East would trigger all-time highs, they wouldn't have expected so. Trying to figure out where markets are going to go is tough.

It's almost as though people were expecting chaos but didn't get the worst-case scenario, and that's being interpreted as reason for optimism. So there's been a sigh of relief.

Last week, we saw the ADP (US payroll) come out. ADP cuts paycheques, so is accurate, and ADP claims net job losses in June. Trump can yell at Powell all he likes, but it will do nothing. Interest rates won't move until there is economic clarity. Not today, but markets are growing desensitized to trade news. Today, President TACO is pounding his fist on the bigger numbers. The Big Beautiful Bill was signed into law, and Big Beautiful Deficits are coming, and he's got to pay for them. Deficits are a headwind to long-term growth. Trump needs revenues, so he's pushing tariffs hard. Uncertainty is very high, while markets are priced to perfection at all-time highs. He was supposed to sign 90 trade deals by now, but there are two frameworks for trade deals, instead (UK and Vietnam). Headwinds are building. The BB Bill offers very little net-new stimulus in tax cuts. The bill just continues what he started in his first term. Rather, there's a lot of spending.

It's about timing. About 18 months ago, he didn't like the valuation in the public markets and so was investing his assets into private equity. Then, he switched back to public markets right before Trump flipped the tariff switch in April. He caught the market bounce of April 8. He likes the lower volatility of private equity, but you give up liquidity. 

The U.S. dollar volatility: There's been lots of talk about it. Year to date, the USD is -11%, but in the big picture, this is noise. The USD is basically where it was in the early 1970s. Historically, the USD spiked in the mid-1980s which led to the Plaza Accord to strengthen other currencies which lowered the too-high USD, and in 1999 when the Euro was created. That said, the USD now does matter. The USD's depreciation, plus the inflationary impact of tariffs that's coming will negatively impact inflation. The Fed pausing rates makes complete sense. The positive side: a weakening USD is positive for earnings, particularly for these sectors (many revenues from abroad): tech, materials, communication services and consumer staples. Look for what companies say about inflation and tariffs during earnings season.

Market Update:

Canada’s population growth slows in the first quarter of 2025, with almost no growth, marking the sixth consecutive quarter of slower population growth. On the other hand, the U.S. Federal Reserve kept interest rates unchanged in June in the range of 4.25 – 4.5 percent, while keeping a projection for two rate cuts in 2025. The Canadian dollar was 72.85 cents USD. The U.S. S&P 500 ended the week down 0.5%, while the TSX was down 0.2%.

Consumer discretionary and real estate slid by 1.6% and 1.0%, respectively, while industrials and consumer staples gave up 0.7%, each. Materials and financials ended the week mostly flat, while energy edged up by 2.6% and technology gained 0.3%. The most heavily traded shares by volume were National Bank of Canada (NA), Tourmaline Oil Corp (TOU) and Keyera Corp (KEY).
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Tariffs do matter: they raise prices almost immediately. If we slap a 25% tariff on all the autos the US imports from South Korea and Japan, that means about 17% of all cars sold in the US last year. This means a 25% price increase on one-sixth of the US auto market. That's on top of EXISTING tariffs on everything from South Korea and Japan. That means inflation and why the indices fell nearly 1% today. A few months ago, that would have been a deeper decline. Remember that the US has a big, persistent trade deficit with South Korean and Japan. So, 17% of the cars in the US market will be priced out of the market. That's good news from US carmakers Ford and GM, but both their stocks fell today. Even after today's pullback, the market remains overbought. These tariff letters by Trump are feeling like they came from Borat--you aren't sure if they hold up to scrutiny, like he's picking these tariff numbers out of a hat. Do we take them seriously? Even if a US company pledges to shift production to the US, it doesn't protect them from tariffs (i.e. Apple). Who knows what will happen next? He is taking profits on some stocks.

Last Thursday's monthly non-farm payrolls report is crucial, giving a real read on labour. Labour can predict GDP growth and the direction of the stock market. LW says look at the employment to population ratio. Data from 1948-1973 yielded a 5.5-year cycle that repeated itself. Every upsurge in employment was predicted by this 5.5-year cycle. The chart from 1971-1995 also had the 5.5-year cycle predict upturns in jobs, though it was more muted than the earlier period. From 1994-2020 also showed peaks based on the 5.5 years. The last five years was skewed because of Covid, but has more recently resumed this 5.5-year cycle. Upshot: the ratio should expand starting now through fall 2027.

There are more foreign investors hedging on the U.S. currency so there will be further pressure on the U.S. dollar which he feels is facing a secular decline. There is more upside to gold since central banks are continuing to buy it as an alternative to the U.S. dollar.There is an estimated $36 trillion in debt which is increasing, and deficit spending is $1.4 trillion per year. 
There is an uptrend in commodities, especially copper due to the renewable energy space and EV's. This makes copper a more stable commodity and there are thoughts it could double to $10 in the next two years. Copper is a by-product of gold production. We should see many more mines started or re-started since there have no new mines for some time.

There was a discussion on stock buybacks vs dividends. He feels it is better to use cash flow to pay dividends which puts cash in the hands of the investors. He prefers companies to use their cash to go more directly to the bottom line rather than use a buyback program. Buybacks can make sense if the shares are undervalued.

Since the guest has not been on the show for four years there are no past picks. There was a general discussion on the reasons for pension funds not putting much of their money in Canadian stocks. He feels there are low returns on capital for quite few public companies and they can get better risk adjusted returns from outside of Canada. It is hard to find the best stocks. 3.7% is a typical free cash flow yield of U.S stocks. Historically 2.4% of stocks in the U.S. create most of the value.