Matt KacurA Comment -- General Comments From an ExpertA CommentaryCOMMENTDec 21, 2017

October was an interesting month. Prior to that the market was very narrow, led by large-cap tech stocks.

But in October, the (market-cap weighted) S&P 500 was down about 1%. But the equal-weight index was actually up almost 5%. Quite a gap in performance. That tells her that the breadth is broadening, stock in sectors other than large tech are doing quite well. 

So there was a rotation in the market. Investors didn't necessarily sell the market. They just rotated away from tech and semiconductors toward healthcare and even utilities. Toward things that are more defensive.

That's encouraging. Historically, a bull market is healthier if it's more broad-based.

Exactly. A lot of the industrial names that supply the data centre buildout have pulled back on fears that the buildout will slow, product demand won't be as great, and profits will suffer.

Pullback is healthy, as a lot of those names were trading at very high multiples.

There's a lot of topline growth, but they're not making money right now. They do have cash, and they'll raise more from the IPO.

Very strong last year, decent performers this year. Higher rates bring concerns about the housing market. Reserve provisioning for loan losses has likely peaked, so reserves may be released.

If you think Canadian economy will improve in 2027 under all the nation-building initiatives, along with trade flows, then the banks will benefit. That said, yields are lower. RY and TD are now below 3%, which is a reflection of how well share prices have done. Dividends are still being increased at a moderate pace.

For clients who need $$ and whose weighting has gone above target, she's been using the banks as a source of funds. Otherwise, still holding for the long term. Don't chase to add new money at these levels, wait for a pullback.

The Canadian budget will run hefty deficits for the next few years: a deficit in line with 2-3% growth in the economy is not something that would significantly to the debt over time. The problem happens when deficits far exceed potential economic growth. That was a factor in the last government for sure. Things are a little better. For instance, oil prices were higher so oil royalties were a lot stronger in last year's budget. Not sure if this will be repeated. When times are good, governments should reduce, not add to the debt load. The bond market: with recent highs, yield were around 5.70-5.75%, which makes it pretty compelling as risk-free money over 30 years. There are challenges to valuations like Apple's which should be lower, so this makes government bonds become attractive. U.S. company earnings are still good. Forward estimates continue to inch up.

The big banks make up 24.33% of the TSX; metals and mining 17%, oil/gas 14.5%, software 7.14%, insurance 7%. The budget offers slightly more headwinds than benefits, such as more competition for the banks, but more of the beneficiaries will be in the private sector, not public. Metals: this sector will grow, but mining is cyclical. Also, critical minerals mining is very small in Canada. So supporting this sector doesn't benefit the TSX much overall. Energy boils down to commodity prices, so the budget can't control that. The outlook for oil/gas is negative. It doesn't matter if we build more pipelines, though getting oil and gas to foreign markets will increase Canadian market share. Overall, the best play is the utilities sector and he recommends the XUT ETF.

The company is about to go public.

We have this AI selloff. It's not that people have stopped believing in it, but they're questioning the economics of the buildout. Will the returns justify the investment? A technological revolution doesn't necessarily guarantee a profitable investment. In the era of railroad-building, many went bankrupt and a lot of people lost money. AI could follow the same pattern.

You want to look for the businesses that are going to capture the resulting productivity gains. Businesses that have moats, durability, and can exploit AI to their productivity advantage. It may not be those who are producing the intelligence. Healthcare is a space that's ripe for disruption from AI.

Focus on diversification. Manage the inflation and growth risks in your portfolio. Make sure you have the risk right during all this market chaos. If your portfolio was uncomfortable during recent weeks, use any year-end rally to get your risk balance on par with your risk objectives.

Yes, you should look at the distribution calendar as we come to the end of the year. Keep an eye that you're not getting returns in excess of what you've been there for.

Market-cap weighted means that you own a stock in exactly the proportion that the market tells you to own it. Whereas in an equal-weight breakdown, you have the same percentage in each holding.

Market-cap gets us into the situation where 40% of the S&P 500 is represented by only 5-6 stocks. That concentrates your portfolio. 

VEE is emerging markets. He'd look to diversify. You need to consider inflation, growth, and the shocks that come from those 2 areas.

If you don't want bonds then he'd suggest having a gold or precious metals ETF. Perhaps add a sliver of bitcoin ETF. Instead of bonds, look for some managed futures strategies (such as DBMF) to provide ballast and non-correlation.

Pros. Especially for smaller investors, you can buy everything the world has to offer and pay only a few basis points. Incredibly inexpensive. Instant diversification. Transparency. Liquidity. Some tax efficiencies.

Cons. Trading costs. The spreads can be wider. Products can be complex, with investors not always totally understanding what they're buying. Tracking errors. Construction matters. Over-concentration. Watch the fees you're paying.

Good question to consider. With the funds available, you need to be able to diversify. Your bonds also need to be diversified. You want an inflation hedge. Hard to do with individual securities and takes a lot of time.

ETFs are a tool you can use to build your portfolio. Definitely good for seniors.

The closer calls are to being at, or in, the money, the larger the premium and the more the upside is cut off. You want to look for ETFs that do dynamic covered writing, where they manage the calls as prices change.

And, yes, you can buy it back right away. But if you sold the call at, say, $10 instead of $12, the monetary benefit is different.