Ian R. CampbellA Comment -- General Comments From an ExpertA CommentaryCOMMENTSep 17, 2008

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.

The big US banks report this week and are expected to report excellent numbers, but can this performance continue? The economy is growing. Watch for anything the banks say about consumer sensitivity and inflation, like credit card delinquencies. AI is an exciting story and will shape economies for decades to come but is creating volatility in the market, making it speculative.

It's more important to hear what the US Fed says about trade than the inflation announcement at the next Fed meeting. If we get another sharp inflation number, the US Fed could raise interest rates in two weeks. He doesn't think Canada will see a rate hike. If the US raises and Canadian doesn't, that answers where the risk is in the USD/CAD trade.

Most people feel inflation when they pay for groceries and gas, but wages drive real inflation longer term. Wages are the cost of input for most, not all, industries. But wages matter in the North American economy which is 70% wages. Technology actually creates a lot of disinflation; machines, not people, work farms, which lowers costs. Wages troughed in 2011, the year the average Baby Boomer turned 65 (and retired). Since then, more have retired and now we have less immigration. The future of demand/supply in labour will tell us where inflation will go. More of his own staff has asked for raises beyond inflation, because of the sudden shock of inflation in recent years. Nothing wrong with asking that. But the new inflation base is unlikely to remain 2%. The population is shrinking, therefore is bad for the labour supply. Can AI replace those workers? Some. Some AI can replace those workers, but not all. During earners, what will companies say about wages and pass those costs to consumers?

We've seen a lot of rotation in the last 30-45 days. Tech was where most investors were crowded into, and now the air is really coming out of that sector while other sectors are starting to move. US healthcare is really making moves, as are US financials (Canadian ones have been doing that for some time). Sector breadth is broadening as investors look for returns.

His team trimmed its tech exposure over the last month. They're not moving out of the sector entirely. There's often rotation inside the sector itself -- software stocks were beaten up in the first quarter, and now some are coming back to life. At the same time, chips and semis are losing some steam.

He's looking at anything under ~$5B in Canadian industrials and technology that's been left for dead in the summer, a not-unusual occurrence when volumes dry up. Yet the fundamentals on a lot of them have been extremely strong. If they continue to execute from a business standpoint, the stock price should follow.

His firm follows top-down indicators, and these are all still positive across all market caps. Seeing rotation into different sectors. If you project where growth is going to be, and where inflation is going, it looks as though the fall could set up quite nicely especially with the earnings expected in the next few months. It should all have a positive impact for the markets.

There's always rotation going on in the market. So you need to have a diversified portfolio. You need to have a stop point, so you know when to get out and when to stay in without emotions taking over. There's a great book called The Art of Execution, which defines how you should think of yourself as an investor.

If you look at the World Cup since 1930, stock markets tend to do a little less well than average in years with a World Cup. If you look at the down markets we've had in the last decade (2018 and 2022), both were World Cup years. Based on the data, we might have a bad second half of the year ;)

You have to be aware of them, but certainly don't try to predict them. It's incredible to think that if we went back a year ago and he told you that we'd see the Canadian economy flatline, CUSMA not be renewed, lingering conflict in the Middle East, affordability pressures, high unemployment, and yet the TSX would be up 30%.

The stock market's much better at telling you where the economy is heading, than the other way around. Strength in corporate profits is a much bigger driver of stock markets than the economy is.

Every day it seems as though it's semiconductors and the AI buildout, while the narrative on software has moved things in the other direction. Underneath that, financials have done very well around the world. Other parts of the market are starting to perk up.

Finding good stocks with good valuations is becoming much more idiosyncratic. It's harder work, as it's not obvious where the pockets of pessimism are. But with 10k stocks around the world, there's always something to uncover.

Stocks showing up on his radar are those whose price is depressed in the short term for whatever reason, but the long-term business is attractive.