Brooke ThackrayA Comment -- General Comments From an ExpertA CommentaryWAITMay 07, 2020

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.

Look at a 3-year chart. You can see how, with the Iran conflict, it's broken out of the longer downtrend. For 2026, you can spot the higher lows. Given where we are in the market cycle (phase 3), that's typically where energy is really strong. Economy's running on all cylinders. Geopolitics lead his team to believe that oil is going higher.

The Canadian Energy Index shows that Canadian energy stocks are leading to the upside. The concern is that we're transitioning to phase 3, which is the peaking cycle of a 4-year cycle. If we were starting a new cycle, he'd be very bullish. Markets are toppy, and he's worried about a broader pullback in the net 6-9 months.

Crude corrected quite a bit, while Canadian energy names moved sideways. They're now trying to reaccelerate to the upside. Energy stocks are poised to push higher, and that rising tide should lift all boats. Better to buy the worst stock in the best-performing sector, than the best stock in the worst-performing sector. Energy will continue to see tailwinds over next 6-9 months.

All the banks are doing well in capital markets. If he's correct on the long-term cycle work, seeing a rotation into hard assets -- gold, copper, silver, lithium, oil. That will attract foreign investor interest, who can't invest easily in hard assets but can invest in their proxies (the banks).

He's very bullish on Canada. The banks should continue to work. They're extended here, doesn't mind trimming a bit (especially if an outsized portion of your portfolio). For the most part, technicals are positive.