John ZechnerA Comment -- General Comments From an ExpertA CommentaryCOMMENTJun 28, 2018

He liked the speech last Friday by new U.S. Fed chief, Kevin Warsh. He did a good job guiding the market and not guiding it. He wants to be less transparent than the previous chief, not to be handcuffed. He expects more uncertainty and volatility, which is not a bad thing. There's coordinated interest in keeping the cost of financing US debt as low as possible. Expect the bond market vs. the US government in who wins, and will add volatility. The Fed should not hike, especially if there's another month of soft employment. Raising rates won't fix inflation, which is caused by AI capex, Congress' spending and the US-Iran war propelling oil prices. He sees a fiscal cliff coming, endangering growth in 2027-8. What matters are employment numbers and consumer spending.

He compared crude oil futures and CPI US charts. When oil rises, so does CPI and both decline together. Now, the US-Iran is a maor inflationary factor. Add to that less globalization as Trump tariffs the world. The new US base inflation rate will be higher than the targeted 2.0%, like 2.5-3%. It will be tough to reach 2%. The street bets that there's a 51% chance that the Democrats will win the Senate, though likely the Dems will take the lower House without problem. He predicts Trump will stop Iran from having nuclear weapons, which could be ugly but temporary. He's looking at the the WAR and JEDI and XAR ETFs for defence as trades. In a lame desk presidency, Congress will spend less and slower economic growth. This is positive to manage the deficit, help interest rates to decline and for bonds, more than for stocks.

US market still has plenty going for it, but the easy part may be behind us. Economic growth still holding up well. Corporate earnings remain healthy. AI story continues to deliver -- recent earnings reinforced that demand for AI infrastructure remains incredibly strong.

We're seeing evidence that AI doesn't necessarily replace traditional software, but can make those platforms more valuable and more productive. That's an important evolution in the AI trade. Challenge is that investors are already paying a lot for that growth. Interest rates remain elevated. Valuations are slightly stretched, especially in parts of the market. Expectations are still extremely high.

Her team isn't necessarily stepping away from US equities, but they're becoming more selective. Still likes technology, particularly companies supplying the AI buildout. Also looking beyond the biggest winners for the next areas of opportunity.

Canada offers a very different opportunity set. We don't have the same growth engine as the US. But we do have meaningful exposure to energy, materials, and financials. 

The economy has shown some encouraging signs of resilience. This week, all 6 banks beat earnings expectations. That's another indication that corporate Canada is holding up reasonably well. Financials have already had a tremendous run YTD, so there could be better opportunities elsewhere in the Canadian market.

Valuations are a little stretched. We're into the time of historical seasonal weakness. Still lots of turmoil between Canada and the US. Geopolitical risk is still there as well. And US midterms are right around the corner.

Wouldn't be surprised to see some volatility. Ultimately, diversification will remain the centre of her strategy -- by sector, geography, and source of growth. At this stage of the cycle, depending too heavily on any single market, sector, or theme could hurt you.

Price targets are set for every single stock she owns. When stock hits target, her team reassesses. Is there still more upside? Trim and take profits? Sell the whole position? Lots of moving parts. She only wishes it were that easy to have one rule :)

We're in a really healthy market. The market was heavily concentrated in a few large-cap growth names, which are great companies. Given the economic backdrop, and persistent inflation, money's been moving to hedge against inflation in sectors really well-suited to that environment.

So there are opportunities to make $$ in a bunch of sectors, some of which aren't well-owned. Provides a multi-year runway for investors to build some diversification.

We had 40 years of declining interest rates to 2020, and there are industries and assets that do well when money gets cheaper. So the power was in the hands of the borrower.

Today, power's in the hands of the lender. Long-term interest rates are going higher. If you're a company that generates tons of excess cash, it doesn't matter -- you can take that capital and return it to shareholders or make investments. 

There's a different genre of business you want to own now. Energy producers, base metals miners, some agricultural companies, and the financials.

Between 2012 and 2021-22, the US was the only game in town. At the same time, the USD was appreciating. A lot of international investors bought US dollars to get that appreciation as well as US growth stocks.

For international markets outside the US, financials make up the biggest sector and materials are significant. Energy and industrials are important sectors. These sectors are all benefiting in this world.

Now that the USD has been backing off against virtually major currency, and international markets are outperforming, it's only natural that some of those countries say maybe we take some back to our local market. The flows favour international stocks, which are a lot less expensive than US equities. 

Most people are long the US to begin with. So perhaps the opportunity is to focus on those less expensive markets.

At his firm, they have about 28% in financial services (by far, the biggest weight). Generating a lot of free cashflow. Capital reserves are very strong. Continue to beat estimates in different ways.

Great run over last 2 years. Around the world, banks have been strong everywhere. Long-term rates moving higher, and short-term rates relatively low, the spread they can make on their loans is pretty darn good. When markets continue to be decent, then capital markets are strong and so is wealth management. He doesn't see any major change to that.

Can companies pull back 10% at any given time? Absolutely. And they have pulled back over the last 6 weeks or so, but that's fairly typical in a longer-term bull market. He'd be a buyer at these levels. Structural backdrop is supportive.

They typically last 1-3 weeks. Seeing short-term price momentum weaken, and NASDAQ moving below its 50-day MA. These short-term corrective phases normally see a 2-3% pullback.

But what his team is actually monitoring are 10 different technical factors that indicate a transition to phase 3 of their market-cycle model. That's typically when the economy is late cycle, and is the peaking phase of your average 4-year cycle

More broadly the S&P 500, the TSX Composite, and the Russell 2000 remain quite constructive. All are trading above 50- and 200-day MAs. Starting to see early signs of some fraying, so market internals are coming off a bit. Market breadth is weakening a bit.

One of the most interesting things over the past couple of weeks is that the S&P and the TSX are making new highs, while the SOXX (Semiconductor) ETF is heading in the opposite direction.

If you look at the gold futures chart, you can see what looks like the end of the consolidation phase and the start of a new uptrend. He's definitely very constructive on gold.

Appears to be a rotation into gold and away from the growthier areas of the market, which is concerning.

Until last couple of years, lifecos have underperformed the banks. But now, typically a big beneficiary of higher interest rates. This is providing a strong tailwind. Really likes them. He'd be using weakness to add exposure.