Jim LebenthalA Comment -- General Comments From an ExpertA CommentaryCOMMENTNov 22, 2023

Canada needs to look internationally to raise capital to finance the country's massive build-out. Need to offer a significant premium to money-market rates to attract investment. Ideally, investment should come within Canada; if investment comes outside the country, then those returns leave Canada. U.S. Fed: they should not hike interest rates, though the street is betting on it, and the Fed likely will.

Over 20 years, think of an all-equity, global ETF. Think technology. Look at Vanguard. Avoid fixed income.

How the U.S. Fed will react to inflation. The market is pricing in a 25 bps rate increase, with more to follow. But he doesn't think inflation is as big a problem as the market perceives. The Fed's favourite metric is core PCE; its historic range is 2-3%. The Fed's target should be higher than 2% which is not realistic. The oil shock is driving inflation now, but indicators point to median inflation, which is good. Higher rates won't fix high AI spending and will hurt only poorer people.

We're seeing the typical script. In August, his team was warning clients to be careful. Usually you have a swoon in September, which typically lasts until October 11-14. Then we usually go into a seasonal rally and a Santa Claus rally to end the year.

It's playing by the book. But there's no ignoring the fact that there's a 90% chance that the Fed will raise interest rates next week. That's a serious headwind. With 10-year bond yields cross 5%, and oil getting to critical levels ~$100, investors have to start taking notice. You have to wonder if this is just the typical swoon, part of the script? Or is it the start of something more concerning?

For a typical client portfolio (70/30) he's been pretty aggressive, even up to 90% equity. His team believes we're in a really good, unfolding bull market. 

When you go into periods like this, you want to have respect for your asset allocation. When things start to turn, they don't turn right away. By the time you get 4 data points, you already have a market that's down quite a bit.

He doesn't think we're going there. This is a buying opportunity. When they add up the sum of the parts of the market (they cover 300 companies), the earnings power we're seeing is unbelievable. It really is. Growth rates are so much higher -- the kind you see coming out of a recession, but we're not. We're 4 years into a bull market.

Earnings growth is so good, he thinks we'll be in an elongated cycle. Things can disrupt that, such as Federal Reserve error or oil going to $150. So you have to be somewhat mindful.

No, growth rates are very strong. Strong for the rest of this year and for next. They look to start slowing to a more regular pace of 12-14% in 2028. But we'll see. The numbers keep getting ratcheted up. The spending is real. 

We're seeing productivity gains to small caps, which have been rallying and outperforming. They're very interest-sensitive, so should be going the other way. (They are right now because everything is.) But they've done better than big caps. Productivity gains are being felt across the board. 

We're into a really beautiful expansion, and people are still misjudging the upside.

What we've seen is just a supply response -- there's just not a lot of copper out there. But we're going to need it for a long time. It's a great play, but it's already reflected in the stocks and they're not as cheap as they were. He owns a bunch of them.

Still likes FCX. Grasberg coming fully online will be very beneficial. Likes HBM, LUN, CS (though higher risk), TECK.B with its Anglo merger. You can own them all, but FCX is probably the best bang for your buck right now.

In the markets, 1+1 does not always =2.  :)  These things got way too pricey. There are bound to be interest-rate gyrations when the US is going to raise rates 2-3 times. If the US raises rates like this, the BOC will probably have to raise a bit as well (probably not as much). That's what the market thinks.

Yes. But you have to take a step back and believe that this is a political game, being done for political reasons. At some point, everyone is going to want to make a deal in the next 6-12 months. This too shall pass.

Right now, it's all about the potential for greater inflation from higher oil prices and bond yields moving higher again. Higher bond yields and oil prices put inflation, valuations, and central bank moves back into focus.

That said, equities are still on solid ground at this point driven by the anchor of really solid earnings growth. We haven't seen this type of earnings growth in many years.

Since the mid-August highs, the S&P is down about 3%. September plus midterm elections could cause volatility to persist for a while. He'd be a proponent of using cash to take advantage of stocks that have dipped in the last little while. Take a look at high-quality names that are only down because the market's down.

Good news is that, historically, the 6-12 months after midterm elections tend to be one of the strongest periods ever on average. Hopefully that's the case once again. He thinks it'll be driven by earnings, continued capex expenditure, continued AI investment, as well as reshoring and nearshoring.

Historically, you see about a 15% drawdown in years where there's a midterm election. It doesn't mean you'll see that drawdown every single year there's a midterm election. It's just the average.

So far this year we've seen a 9% drawdown. But he could see that the combination of September seasonality with midterms would add a bit more volatility this month. Hard to say. We're down 3% since mid-August. If markets head 5% or even 10% lower, he'd use cash to buy equities.

Very difficult. His sense is that we'll see an eventual easing of tensions, and things will normalize to a certain extent. But keep them in mind. Does a company have a lot of US exposure? Do they ship a lot to the US? Do they have business in the US?

DOL, for example, doesn't really have business in the US and so they're not really affected by tariffs.