Jason MannA Comment -- General Comments From an ExpertA CommentaryCOMMENTJan 13, 2023

Yes. We've had 9 straight weeks of a rapid rise, certainly one of the fastest V-bottoms he's ever seen. Trees don't grow to the sky, you need the pause to refresh and a bit of rotation. Otherwise, it just gets out of hand. So he's kind of happy to see that action, where the weak hands get wrung out.

Maybe we get a bit more of a correction, or a consolidation to mark time. Then we can lift off again.

Yes, it absolutely does make him feel better about the forward outlook on the economy. In NA especially, the consumer's a big part of the economy. Yes, there's a lot of capex spending through AI and construction projects. But you need the consumer to feel good enough to spend.

Lots of people have been talking about this K-shaped economy, where 10% of the population is doing something like 50% of the spending. But with those kinds of job numbers, you can argue that the 10% still feels pretty good. We have to keep monitoring that 10%, and the other 90%, to see how they feel about job prospects, keeping up with inflation, and whether they can continue spending on their merry way.

Two key components. One is valuation, and one is sentiment. Sentiment just doesn't want to give up. Part of the reason shows up when you look at the bond market -- it hasn't been a great place to be over the last 2-4 years, but the stock market has. 

Some may be saying that if inflation keeps rearing its ugly head, and central bankers actually increase rates, that's going to hit my bond portfolio. I'm already only making a 3-4% yield, and now may be taking a capital hit. I might as well go into growth assets -- earnings and operating margins keep going up, unemployment rate is low, governments keep spending. (He hates to say this, but the war is actually good for the economy.)

People are saying this has been the best game in town, so why stop? Especially when they don't see any clouds forming.

The market breadth is narrow; on average on a given day, we're making more 52-week lows than highs, which is not a sign of a robust bull market that will continue. A handful of stocks are keeping this rally going. Also, people will take money out of similar tech stocks to buy SpaceX on Friday, but not semis. The U.S. Fed should not raise rates, and it's wrong that the market is pricing in a hike. Rising rates should put a brake on the market. The US-Israel-Iran war won't end peacefully until the regime changes in Iran, he think, and clearly the US and Israel have underestimated Iran's strength in fighting back. The longer this war takes to resolve, the worse it is for inflation.

When the market bottomed in mid-2022 and the rally that followed, the market mostly was above the 200-day moving average, despite a few corrections. When a market gets cheap, about 10-30% of stocks trade are above the 200-day. Presently, 59% of stocks are. During peaks in 2023, over 70% were. Peaks in 2024: 80s or 90s in terms of percentage. But during the 2025 peak: 70% only, just like now. So with each new record high, fewer and fewer stocks are participating. Market tops are impossible to call, but market bottoms are easier because of the panic and fear. Euphoria dies off slowly. 

Rabidly enthusiastic demand for stocks, which is shown by S&P 500 and the TSX hitting sequentially fresh all-time highs. Next week will be an interesting test of investor mettle, as that's when the enthusiastic demand collides head-on with unprecedented supply. He's referring to the SpaceX IPO, by leaps and bounds the largest IPO ever. 

Add to that the OpenAI IPO later this year, and Google recently raising $85B.

We don't know how it's all going to play out. What we do know is that history teaches us that some of these blockbuster IPOs garner a tremendous amount of attention, but don't always fare that well in their rookie season.

It can go one of 2 ways. The IPOs coming down the pipe could create a halo effect and add fuel to the fire of enthusiasm for thematically similar businesses. Or, they could compete with some of the leading index heavyweights and siphon investor $$ away.

His team is going to be watching with interest in the coming months.

Not trading yet, but IPO coming fairly soon. Not much of a publicly traded healthcare market in Canada, so this should attract a fair bit of attention. 

Well-positioned, generic drug manufacturer. An exciting catalyst are GLP-1 drugs, and it has the first license to sell. His firm doesn't generally buy IPOs, but they're taking a close look at this one.

Lumber companies are not good businesses, full stop. They're commodities, and this period in time with tariffs and trade is particularly fraught. After the pandemic deck-building peak, demand and prices crashed. Tariffs have been plaguing the lumber industry almost 30 years now, his entire career; they're not going away. Canadian industry is being decimated.

As well, primary use for lumber is housing, and housing demand is still subdued because mortgage rates are still high.

A trade at best. Instead, go downstream for a company that adds value such as DBM or SJ.

Run up, so take some profits. You don't want to sell them, though. Good line of sight to double-digit total return over a cycle. Yes, we're in a "technical recession", but it's narrow and concentrated in certain parts of the economy. As well, the banks own global and US assets, and the US is not in a recession.

That's the $1M question. When the Iran conflict broke out, that trade got expressed in terms of higher energy prices. Peak pessimism saw a spike in oil to $140 a barrel, which is just not sustainable. Now it's traded down on the prospect of peace.

Commodities are also rising on the back of inflation that comes through from energy. The TSX is up, but the question is how much retracement are we going to see when peace takes hold? We'll definitely see some, and for some areas it could be significant.

He wouldn't recommend pivoting out of your winning AI and energy trades, but it's definitely time to think about taking some profits. Moving forward, you want to be pushing capital into areas that the market has really ignored.

Midterm elections in November will also be very significant for the markets. CUSMA negotiations are coming up. 

Really surprised by their strength. Poor economy, in a technical recession now, probably a full recession next quarter based on what we're seeing. Yet the banks are moving higher.

Higher interest rates are good for banks until we see credit losses. Banks have not built up provisions. Lower rates would be beneficial for the Canadian economy, but bad for banks. But with oil at higher prices, it's very difficult to see rates being cut.

When he sees how much banks have run, he's taking profits for good risk management. Doesn't see the trajectory as sustainable. Remember how much these banks declined in 2008.

Healthcare looks fairly cheap. An example is AZN, which will increase revenues by 1/3 between now and 2030. Stock's up, but not meaningfully.

Consumer staples is another sector. Luxury goods have been decimated.

Money has flowed into energy and defense. If those stocks sell off, that capital will need a pathway to be redeployed into the economy. It'll be interesting to see where funds flow.

He doesn't generally buy day-of IPOs. Problematic. Price will be hyped up, and will probably disappoint. Is SpaceX like the AOL-Time Warner trade (a serial disaster)? Don't buy. Wait and see how it plays out.

Interesting category, with a number of ways to play -- traditional satellites, weapons, communications. The ultimate question is does the business create money? Are revenues sustainable and growing? You have to wait and see.

Everybody has their eyes on the major transformation of AI and its enormous potential. Valuations are quite high, and the market is concentrated in these stocks. His firm is there.

There are also other leadership themes. Most of them are sectors that either benefit from or provide a hedge against inflation.

Things that are more disinflationary or reflect economic weakness really are nowhere to be seen. It's a market of haves and have-nots. It's a market you can be both targeted and diversified in while being involved in the AI trade.