Javed MirzaA Comment -- General Comments From an ExpertA CommentaryCOMMENTJan 31, 2025

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's 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. 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.

They're cautious because they're fearful that the ROI on the huge investment (approaching $1B) isn't going to be fulfilled. Thinks that's unlikely, but the markets are rightfully cautious. Not a terrible thing for investors, forcing them to take it a little slower. 

For a long time we heard about the Mag 7, with extreme concentration in these hyperscalers. The other 493 stocks in the S&P 500 were an afterthought. As money flowed to the Mag 7, many of the other 493 companies continued to do quite well but weren't getting any love. That meant that the valuations were becoming more and more compelling.

Areas include consumer stocks, healthcare, and some industrials. One area that was particularly shunned, which his team made a decisive move on a couple of years ago, was healthcare. He's been on BNN during that time saying that he didn't know when it would move, but that he was quite confident that it would. And it has. Seeing not only green shoots, but very good moves.

His firm has allocated money to AI all along, but in a smaller percentage. It's such a broad area, that to be market weight was too big a bet for his clients. The area has great promise, but his team doesn't want to take on the risk side of the equation to the full extent.

They've been underweight in consumer service companies right from the beginning. They made up the difference in performance by very good stock-picking in the other 493 companies. On a risk-adjusted basis, his firm is way ahead.

Out of stress or negative issues comes opportunity. It forces change. Pre-Trump, Canada hasn't made investments in Canada that need to be made to fulfill what we do well, which is our industrial base (critical minerals, energy, power). 

If you look at the stats, the investment that we're making per worker has fallen dramatically (~15%) over the last 10-12 years. In the US it's grown by 25%. Our hand has been forced, and we might look back and say it was a great thing. Take a look at an article written by Don Moss on goodreid.com under Insights, "Canada's Industrial Restart?"

Don't be too quick to make changes. The macro situation is changing so quickly, and Trump has his TACO nickname. Be prudent, and watch what you have. Don't jump based on the news flow.

Hopefully, you came into this well-diversified by both geography and sector. If you did, just continue to hold down the fort. Individual companies, if hurt badly, may create more of an opportunity than a problem. Be patient with your problems, as they may change.

Look for opportunities, because these times aren't permanent.

Middle Eastern production is down 7.5 million barrels per day, we have forfeited nearly 4.5 million barrels cumulative of Mideast production, and exports out of the Strait of Hormuz are 12-20 million barrels daily (if you trust the White House) though 7-8 M are more likely. So, now we can't drawn much more production, and Iran is aware of this. Also, Ukraine is blasting Russia, which lowers oil refining, and the Houthis are attacking Saudi refineries. Diesel prices are up 60% the past year and gas is up 40%. China saved the oil market by dropping their imports by 5.5 million barrels per day, which is massive. We may see weakness in the refined product, but the strength will transfer to the oil price. Everything is on the table: oil prices could soar past $100, 120, 130, 140, 150. This war was supposed to last 2 weeks, and now it's month 7. We are in a critically dangerous area for oil. A key risk is bad US policy from now till the US Midterms. The US 10-year is at 4.8%. 5% is the red-light level. Energy is the biggest inflationary factor. The oil price is high, Trump has only a 33% approval rating heading into Midterms, and the is very unpopular with both sides of the House. Bad policy would be a crude or diesel export ban, or a TACO that will result in a massive loss.

The US jobs report came out this morning and blew everyone away, very strong. That will add fodder to the arguments of the Fed hawks, though there might be some dissenters.

For the BOC, the job number today was very weak and broad-based by sector and region. Very much poured cold water on any thought of a near-term rate hike by the BOC, and there wasn't much inclination of that.