Larry Berman CFA, CMT, CTA A Comment -- General Comments From an Expert A Commentary COMMENT Jan 13, 2025

We've started to see it. In the earlier data we saw some pull forward of demand for different products. The Canadian numbers for August were pretty staggering in terms of the trade deficit. So we're starting to really see the impact and the bite of tariffs.

Everybody's sitting on pins and needles, there's just so much geopolitical tension right now. And that's what's captured everybody's attention -- how long will it last, and how will it play out over the long run?

The flipside to what's going on geopolitically is what's going on in the technology sector in terms of chip demand and the buildout for AI. There's a massive land grab going on right now, and it's massively expensive.

Different parts of the market are pushing higher. The way that the indexes are composed means that some of these larger companies are getting more and more fund flows. There are always nuances to the market overall, but this is more of a continuation where just a few names continue to drive the market.

He doesn't do it quite like that. Cash in the portfolio is a by-product of opportunities within the markets. Some parts of the market are definitely overvalued, but there are also undervalued parts.

There are about 50 names that he'd be willing to use in client portfolios, with about 30 names in a standard portfolio. About half of them would be within the buy range, and half aren't. Just be patient, as you may get an opportunity. And that goes back to the volatility.

Important to know what you want to buy, and what price you want to pay. Then just watch and wait. Because the market's so volatile, you'll likely get a really good opportunity.

Typically, he doesn't buy into a release. He'd wait for the release and then assess. It's not that he's never done it, but there would have to be a very specific catalyst for him to do so. 

It's been the same themes all year long. If you look at the core sector leadership groups, it's been financials, industrials, and materials really driving the bus. Materials have been exceedingly strong.

There's been continued hedging in portfolios against inflation. Inflation is sticky. While the Fed is now cutting rates, it probably increases the longer-run chances for inflation. You can see that in the long-term treasury bonds.

The TSX is benefiting because our sector makeup in our market is a more inflation-oriented index.

The problem with market-cap-weighted indices is that they can become exceedingly overweight certain sectors. 

So if you look at the S&P, it's underperforming almost all global markets YTD. It's a very growthy index, and some of the sectors that are really working are very small pieces of the S&P. For instance, materials make up ~3%. Whereas in the TSX, the materials sector is a much larger piece (in the teens). 

In a market right now that's uncorrelated, it means that there are haves and have-nots. For active portfolio managers, it means there's an opportunity to add value.

From 2007-2024, the all-world index (ex-US) had almost no return. Whether you were looking at Europe, South America, or Asia. Japan had 33 years of no return.

But in the last 18 months, international equities are outperforming the US. Part of that has to do with ~31-32% of the all-world index being financials, and financials have been very steady. Materials is a much larger piece of the global index. There are also a lot of great industrial companies. 

International investors wound up very focused in the US because it was the only game in town. But now their markets and their currencies are doing a little better, and so we're seeing capital rotate back to international stocks.

Inflation is stickier than the market is picking up on. Things that do well in an inflation-oriented environment are what's leading the market. US jobs date is weakening. If you're a consumer who has assets, the world we're living in right now is great. If you're a consumer living month-to-month on your wages, life is getting more expensive, and wages aren't keeping up.

When he looks at the consumer sector, the breadth of the advance (stocks performing well) of stocks in that sector has been steadily weakening. Tells you that that risk/reward in that group is not in your favour.

Lots of cross-currents in the energy market. President south of the border encouraging "drill, drill, drill", which will likely add to supply. Some pressure may be coming off geopolitically. Price of oil is moving a bit lower. We're coming out of the seasonally weakest time of the year.

Large-cap energy companies have traded better than you'd expect, given where oil is. The big names have been outperforming. The big Canadian oil companies are very different from those in the US, which are producing shale oil. Our reserve life should be worth a lot more.