Bruce MurrayA Comment -- General Comments From an ExpertA CommentaryCOMMENTDec 01, 2020

This is typically the time of year markets get really soft, usually first week of August and through September. Up to now, breadth has been improving and markets have been pretty buoyant as they've been driven by incredible earnings. All in spite of trade uncertainty, inflation, and geopolitical tensions.

However, when you have oil going up $6 in a day as it is today, that's a wrecking ball that's going to upset a lot of things. The yields on the US 10-year were already pretty high, and we've seen them spike again today. It'll be a tough tape for stocks on a day like today.

He's bullish on markets till the end of the year. Amongst the earnings cycle right now, the market's having second thoughts. We're going into the typical August/September swoon. You'll want to buy this dip, and he thinks markets will be higher at the end of the year.

The impact on stocks is key, because bonds are competing assets for stocks. If, all of a sudden, someone can get a reasonable return on a 10-year treasury (right now it's 4.7%), why bother taking the risk on stocks? That's point #1.

Point #2 is that everyone has a balance sheet and everyone borrows to grow earnings. Higher rates can really cramp margins and make everything more expensive. If we have higher oil for longer, it's going to have an effect.

Great question. If we're going into an ultimate bear market, then you want to be cautious. But if it's just another pullback, with earnings growth that continues really robust, you don't want to miss that -- you want to add when there's fear. Typically you have this weakness anyway heading into August and September. There's also uncertainty about the Fed decision next week.

We have all these uncertainties, valuations that aren't cheap, and a lot of expectations going into these earnings. Earnings have been really good, with tons of capex spending. There's a lot of punishment if a stock is perceived to miss.

The bulls will say that all factors that were in place for the runup are still in place. That's where we were until February. Since then, the USD has strengthened and the Fed's become more hawkish in trying to anchor long bonds down. That's what's caused the decline in the price of gold.

Now trading pretty soberly on price to NAV. If you believe that the USD is eventually going to put in a high here and gold will start to assert itself (and that's the better view), then you can buy gold stocks here. Gold stocks can be fickle. Upcoming quarter may see margins pinched a bit due to higher costs, but that's already reflected in the price.

Gold is great. But it works for 5 years, and then it doesn't work for 20. Tough asset to own, not like copper which is all about supply/demand.

AGI and AEM look pretty good. If you don't want those, you can buy the XGD ETF, or GDX and GDXJ in the US.

Good question, which no one can really answer. The future is really unknown here. Action in the Red Sea. Action in the Strait of Hormuz. How many times have we seen the price of oil spike up, then spike down? If things go really badly, this conflict is prolonged, and oil can't get through those two areas, then we're looking at a higher oil price. That will affect the economy and stock prices.

If the conflict ebbs and flows, as we've seen over the last few months, then oil prices won't get that high.

If you have a more sluggish economy, that won't be good. Traffic has to move in both US and Canada. He's an optimist :)  A lot of this is typical jockeying. Deals will get done. The sun will come out tomorrow.

In general, it's a bit of a cautionary note for the market overall. All this fighting is good for oil prices, which is good for the companies that he covers. Higher prices = higher revenues and earnings. So it's very positive there.

But overall, investors have to be cautious for a few reasons. Chip stocks have come under pressure. The Shiller PE is back up near historic highs. And the 10-year government bond yield is just over 4.6% (~5% is where people in the know start to get very concerned about ability of US government to meet its obligations). There are enough things there to worry about.

The defense for that is to pick inexpensive companies that are trading at a discount to peers. Look for ones with identifiable catalysts.

It's a little more vulnerable. The worry is that it'll sell off if there's a selloff in the US markets. We could, potentially, revisit the time between 2000-2010 when commodities did really well but US markets did poorly. 

Time to be a bit cautious, perhaps raise a bit of cash. Be selective in terms of what you choose. Realize that it's been going great for a long time, but that doesn't mean it'll be extrapolated out to the future.

Commodities could do very well if the status quo holds. If the AI balloon continues to stay inflated, that's positive. Uncertainty in the Middle East will mean higher oil/gas prices, especially in Europe. That's all positive for the stocks he covers.

As they relate to oil & gas, it's a pretty good situation for Canadian producers. Geopolitical instability increases the price of commodities, so that's positive for revenues. Every time Trump sends out a tweet at 3 am the CAD tends to sell off, and that's positive when you get revenues in US dollars but expenses in CAD. 

It's an area where there's clearly a need for Canadian production into the US. The US may be the largest oil producer in the world, but their fields are starting to roll over and they still don't produce enough to be self-sufficient. And we're the #1 supplier of oil and nat gas to meet that gap.

That's why the West is trying to get another pipeline built because the growth is all in Asia. Asia is the single-biggest block of demand for energy, which is likely to increase in future.

Very possible, though hard to say what's going to happen. Petroleum reserves have kept prices artificially down. If we get to the point where those supplies have evaporated, that will cause the price to spike and to spike quite high.

You have to look at the utilities sector. Pipelines are also good; though not as good, because they're perceived as being commodity-sensitive (even though they're really not). You could do well with ENB and TRP. Also with PPL, though it's a Hold right now. On the power side, H and EMA and FTS are all good names.

You'll get your dividend, and the safety means you can sleep at night (and that's worth something). You can get diversification via funds and ETFs.

It's probably part of the negotiation tactic by Trump. Best to remember what won't change in the near term, which is that Canada and the US share a border and are each other's largest trader partner. We will likely reach a resolution at some point. Despite the US-Iran war, tariffs, and interest rates, earnings growth is resilient. The AI investment cycle has been strong. Despite volatility, the S&P if up 9% and the Russell 2000 18% this year, which points to a broader market. Eli Lilly has outperformed Nividia 2-1 over the past 12 months, for example. The market is stronger than you believe, despite obstacles.

US banks have done well. In a barbell approach, he owns the higher-quality JPM and GS as well as Citigroup, which is weaker but improving. Use this barbell approach: strong and established as well as improving banks.

There's roughly $1.4 trillion in margin debt in the US. Says Warren Buffett, "People aren't investing. They're not even speculating. They're outright gambling." Historically, then, we'll see markets in any month go up down 1-2%, but this year it's 5-10%. If investors hold a stock that's up 500-600% in one year, they need to remember that stocks historically move up or down 10% a year. So, the most prudent thing is to rebalance and sell half your position. In a few weeks, if the tech companies don't report that the billions they're spending aren't profitable, the market could correct. Rebalancing is important. He's holding 5-15% cash to buy beaten-down stocks. Not only tech, but banks and insurers have gone up fast and far, so take some profits.