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Stockchase Insights A Comment -- General Comments From an Expert A Commentary COMMENT Jan 20, 2025
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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.
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.
Market Update:
President Trump imposed 25% tariffs on goods from Japan and South Korea, starting on August 1. In addition, the copper market is currently in turmoil as President Trump announced a higher-than-expected 50% tariff on copper imports. The Canadian dollar was 73.04 cents USD. The U.S. S&P 500 ended the week up 0.4%, while the TSX was slightly down 0.1%.
A lot more greens this week than reds. Consumer discretionary and industrials gained 1.8% and 1.7%, respectively. Real estate and consumer staples added 1.5%, each, while energy edged up by 0.7%. Financials ended the week up 0.4%. Technology and materials ended the week down 1.7% and 1.6%, respectively. The most heavily traded shares by volume were TC Energy (TRP), Toronto-Dominion Bank (TD) and National Bank of Canada (NA).
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Advantages of ETF's for Investors:
They are a great tool for investors transitioning from passive to DIY
In investing, there is no need to choose between being an exclusively passive ETF investor or a DIY stock investor. There’s certainly room for investors to do both and create their own hybrid strategy. Investors who want to make the gradual switch to DIY stock investing can also take a hybrid approach by starting with broader market exposure through ETFs as core holdings, then selecting individual stocks as “satellite” holdings. As one gets more comfortable with the risks and concentration of owning individual names and develops a more refined strategy, an investor can slowly sell off units of core ETF holdings (or take new cash that come into the portfolio) and move more towards individual names.
There are many ETFs with niche exposures that allow you to differentiate from the market
There are enough ETFs and variety out there for an investor to create a portfolio of ETFs that he or she views as more optimal than the broad market. An example we often use is owning a TSX ETF which would be overweight in financials, materials and energy. A more optimal allocation may include increased exposure to technology, industrials and other cyclicals for investors looking for growth or utilities and REITs if one is looking for a higher yield than TSX. These adjustments can be achieved via specific sector ETFs. One can also tilt their portfolio towards smaller market cap ETFs that may have higher growth potential and are not well represented in market-cap weighted indices.
Why buy one or two stocks when you can buy the sector?
While this sounds like a rhetorical question, there is an actual reason for this: superior returns by being concentrated in a winning stock of course! But the trick is getting to a level of conviction where one can believe the particular stock is a winner in a specific indsutry. Of course, this can require a lot of time and energy researching a company and its competitors. Meanwhile, one may want exposure to this sector until deciding which name(s) to be more concentrated in. The solution: ETFs. For example, you want exposure to the cybersecurity space and are bullish on the sector in general. To not rush the decision of which cybersecurity stock(s) to pick while getting exposure one can purchase an ETF like the First Trust NASDAQ Cybersecurity ETF (ticker: CIBR) or ETFMG Prime Cyber Security ETF (ticker: HACK) to benefit from industry tailwinds and ultimately let the market decide which individual companies get a higher weighting in the ETF (assuming a market-cap weighting).
Low knowledge areas
Related to the point above, another benefit to ETFs is that they give investors access to instant diversification in areas that are far out of an investor’s realm of knowledge. For example, an investor may want emerging market exposure in their portfolio for geographic diversification. If one knows barely anything about emerging markets, it can be a daunting task to learn the ins and outs of companies in foreign countries that have very different economic cycles, regulatory and competitive. Many investors may not even want to own individual securities outside of North America and this is understandable. Again, ETFs offer a solution to gain this exposure of broader regions or specific countries. Of course, low knowledge areas for an investor can also be specific sectors in local or North American markets.
Final Thoughts
ETFs have many other uses that we can on and on about such as hedging a portfolio’s broad market exposure through inverse ETFs, getting exposure to commodities, currencies and precious metals or even using as a proxy for exposure for the 30-day period one needs to wait before buying back a stock sold as part of a tax-loss selling strategy. The point is, given how easy ETF make it for an investor to customize a portfolio and quickly gain diversified exposure, ETFs can find a place even the most active investor’s portfolio.
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