Jon VialouxA Comment -- General Comments From an ExpertA CommentaryN/ANov 25, 2016

Trump's efforts to tame gas prices is in vain. There's no short-term fix before the U.S. Midterms in 2 weeks. Siding with Putin in the Russia-Ukraine war could be the knife in the back for Trump. Given where the US economy is in the first two years, and the Republicans will lose the House to the Democrats, there's no saving grace for Trump anymore. His political capital can be measured on one hand. This week, he's waiting for what the big tech companies say when they report, namely how much capex they will spend next year. Even if companies beat and the guidance looks fantastic, investors remain concerned, because valuations are so rich. The question is: When will these companies become profitable? It's coming, but don't know when. The data centre pushback is already effecting the market, but AI is real an will have a big impact on eeryone.

All the AI is causing a demand shock to the market. Meanwhile, the polymarkets predict a 65% chance of the Democrats taking the Senate, and a complete (91%) chance the Democrats take the House. This means gridlock in Washington which is very good for stock markets, though this market is different given the concentration in AI, which has caused huge returns in recent years. It's projected that US$878 billion will be spent on AI capex in 2027. The AI trade is the only thing keeping the economy going. So many sectors, like housing, are in recession while the US deficit is running at 6% of GDP. Meanwhile, we have to double energy production by 2030 to feed data centres. All this is inflationary. We're reaching an inflection point where the US S&P equal-weight ETF is the better buy and no longer the laggard.

He has seen some early warning indicators. Volatility picked up a few weeks ago and the breadth of the market is becoming very narrow and large cap focused. There is a transition between technology stocks to some of the staple and utilities sectors. He has seen investors rewarding defensive sectors but this is not sustained yet. Health care and consumer staples have made moves up. Interest rates are starting to move up before the Fed's decision and this will affect companies that are borrowing money and servicing debt.

There is also concern over the uncertainty of AI spending and the effects of tariffs. Higher inflation, oil prices and interest rates could impact earnings in the first quarter of the new year. If the central bank waits too long to see where inflation goes before raising rates, they could be forced to hike into a slowdown.

The question was on his view of income stocks or ETF's. Some ETF's hold a basket of stocks and therefore have less individual stock risk. Regarding growth his daughter could look at companies or products she likes, knows and understands, see if they are publicly traded and together they could work on building a portfolio of these companies.

Editor's Note: The name of the company was indistinguishable, both verbally and in captions,although the first part of the name was Energy. No chart was shown. It is in the renewable energy business with waste being turned into natural gas. He has referred to this company in the past. It is improving its balance sheet and should have better quarters down the road.

There's so much to focus on: tariffs, trade wars, geopolitical tensions, interest rates, oil prices, inflation. When you boil it down, it's rates and the impact on inflation. The market projects two more US hikes, and 3-4 in Canada in the coming year which is harder to understand because Canada's economy is weaker than America's. The US dollar's strength surprises him. There's a lot of angst with markets at highs, but facing Trump's policies. You may need to harvest stock gains and buy stocks. The 60/40 portfolio split remains good as the US yield rises to 5%. Are there too many ETFs? He can't keep track anymore, though not one for Canadian defence which he'd like to see.

The middle of October is usually a pretty dark period for equity investors. Midterm elections, an Alberta election, a Toronto election. And then all these gate points that have missed -- CPI yesterday was worse than expected, PPI today worse than expected, US retail sales not so good without gasoline.

Investors are, rightly, reassessing risk. Whenever you have bond yields move the way they have in such a short period of time, people take a great deal of notice. How will that impact business decisions?

Essentially, the bond market has done the work for the Fed and the BOC on rate hikes. The thing that investors have to analyze is whether, in that higher interest rate world, they're still comfortable with their equity exposure? From tech baskets to neoclouds. That's the angst we've had for the last 6 weeks.

Easy to point it out, but the bigger question is how does it resolve itself? Where do we go from here?

Doesn't think so. Normal and very healthy for investors to have this gut check. We're still climbing that wall of worry, and people are still sober. People aren't seeing the once-in-a-generation opportunity that is before us.

This is a 4-year bull market, and it's been pretty generous. But it can be way, way more generous -- as long as we don't have exogenous shocks or really big policy mistakes by the Federal Reserve. If we can contain inflation, and if yields are where they are for the right reasons, that is growth. And there are great places to be.

However crowded the tech stocks are (and the whole world's looking at them), they're still not expensive. Many are trading at a multiple relative to the S&P. S&P's trading at 19x PE for 2027, and that's its 10-year average.

Shows the imperative of owning a diversified portfolio. No matter how high-quality a name is, we all know the lessons of GE 20 years ago. Or Bombardier 30 years ago. Really good stocks can disappoint you at times.

No one silver bullet. So many ways to build wealth in the stock market it's staggering. If you buy the right stocks, and you have the right time perspective, you can do well. Look at SHOP, or even the banks.

Can you do as well with ETFs? Probably not quite as well as being a good stock-picker. But you can still do really, really well. Depends how conservative you are, and what you want to achieve.

The key for him is to have a diversified portfolio, and use ETFs where you don't have an edge. If he's looking at Japan, and he really doesn't have an edge, he's going to buy the ETF. Or if he needs currency hedging.

It doesn't change his expectations for a second rate hike there. There are a number of things contributing to it. Defence spending is quite high, as is AI infrastructure spending. Plus the dislocation in energy markets. It's been hard to get inflation under control.  

The problem the Fed's facing right now is that inflation's been above their core target for more than 5 years. So the new Fed chairman is taking a harder line.

If you look at the futures curves, it looks as though we could have a second rate hike later this year. But it's a dynamic environment, and things can change quickly.

Yes. Fear seems to keep growing daily because of uncertainty. For example, how will the midterm elections play out? 

One thing that gets glossed over is the fixed income market in the US. Foreign countries own US treasuries. If US trade with those countries goes down, their ability to hold those securities goes down as well. Japan's bond market is internally sourced, while the US has a bigger reliance on foreign investors. 

The uncertainty negatively impacts the rate outlook.

What you're looking for on valuation doesn't change. But your return expectations do. In Canada and the US you get very concentrated markets, and with those come pockets of overvaluation.

Important to have a disciplined process and rebalance. In Canada, the only things flying high right now are financials and energy. In the US, it's the tech names. A lot of sectors are still really down on their luck, and you can find some good opportunities.

He finds this sector puzzling right now. (He started his career as a bank analyst, and has been around them his whole career.) The valuations today are not seen very often; about 20-30% above 5-year averages. EPS growth in same range. Not sure if it's because money has flowed out of the US and into Canada? Pretty sure it doesn't have to do solely with growth outlook for the banks.

Very shareholder-friendly. Great dividends (though yields have come down as valuations have gone up). Buying back lots of shares. Rising rates pose a challenge, making the valuation of Canadian banks a bit vulnerable.

If you own, consider rebalancing a little bit to free up some capital. Don't exit entirely. To allocate new capital, just wait.