Opinions Stockchase InsightsA Comment -- General Comments From an ExpertA CommentaryCOMMENTJan 20, 2025
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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.
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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.
Clearly on solid footing. There are concerns about the economy and any impact from tariffs. Many banks are trading at multiples above average, but there may be reasons for that. They have diversified revenue streams.
Broadly, banks have a place in your portfolio. As do strong, big US banks.
Broadly, you're not taking a hit when buying US holdings in US dollars. US dollars will continue to appreciate; if they don't, it's a roundtrip eventually. You want to look at the company itself.
As always, be diversified by sector and geography. So why not be diversified by currency as well? Important to own in CAD, as well as in USD and international currencies via ADRs.
With CDRs, recognize that the volume of trading will be a bit lower. There could be some slack in the bid/ask. There are costs to owning CDRs, which could be as much as 60 bps.
For him, if he's going to buy a US security, he prefers to buy on the NYSE. His clients have benefited, as the USD has appreciated very well over the years.
Advantages of ETF's for Investors:
They are a great tool for investors transitioning from passive to DIY
In investing, there is no need to choose between being an exclusively passive ETF investor or a DIY stock investor. There’s certainly room for investors to do both and create their own hybrid strategy. Investors who want to make the gradual switch to DIY stock investing can also take a hybrid approach by starting with broader market exposure through ETFs as core holdings, then selecting individual stocks as “satellite” holdings. As one gets more comfortable with the risks and concentration of owning individual names and develops a more refined strategy, an investor can slowly sell off units of core ETF holdings (or take new cash that come into the portfolio) and move more towards individual names.
There are many ETFs with niche exposures that allow you to differentiate from the market
There are enough ETFs and variety out there for an investor to create a portfolio of ETFs that he or she views as more optimal than the broad market. An example we often use is owning a TSX ETF which would be overweight in financials, materials and energy. A more optimal allocation may include increased exposure to technology, industrials and other cyclicals for investors looking for growth or utilities and REITs if one is looking for a higher yield than TSX. These adjustments can be achieved via specific sector ETFs. One can also tilt their portfolio towards smaller market cap ETFs that may have higher growth potential and are not well represented in market-cap weighted indices.
Why buy one or two stocks when you can buy the sector?
While this sounds like a rhetorical question, there is an actual reason for this: superior returns by being concentrated in a winning stock of course! But the trick is getting to a level of conviction where one can believe the particular stock is a winner in a specific indsutry. Of course, this can require a lot of time and energy researching a company and its competitors. Meanwhile, one may want exposure to this sector until deciding which name(s) to be more concentrated in. The solution: ETFs. For example, you want exposure to the cybersecurity space and are bullish on the sector in general. To not rush the decision of which cybersecurity stock(s) to pick while getting exposure one can purchase an ETF like the First Trust NASDAQ Cybersecurity ETF (ticker: CIBR) or ETFMG Prime Cyber Security ETF (ticker: HACK) to benefit from industry tailwinds and ultimately let the market decide which individual companies get a higher weighting in the ETF (assuming a market-cap weighting).
Low knowledge areas
Related to the point above, another benefit to ETFs is that they give investors access to instant diversification in areas that are far out of an investor’s realm of knowledge. For example, an investor may want emerging market exposure in their portfolio for geographic diversification. If one knows barely anything about emerging markets, it can be a daunting task to learn the ins and outs of companies in foreign countries that have very different economic cycles, regulatory and competitive. Many investors may not even want to own individual securities outside of North America and this is understandable. Again, ETFs offer a solution to gain this exposure of broader regions or specific countries. Of course, low knowledge areas for an investor can also be specific sectors in local or North American markets.
Final Thoughts
ETFs have many other uses that we can on and on about such as hedging a portfolio’s broad market exposure through inverse ETFs, getting exposure to commodities, currencies and precious metals or even using as a proxy for exposure for the 30-day period one needs to wait before buying back a stock sold as part of a tax-loss selling strategy. The point is, given how easy ETF make it for an investor to customize a portfolio and quickly gain diversified exposure, ETFs can find a place even the most active investor’s portfolio.
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