A Comment -- General Comments From an Expert (A Commentary)

The problem calling recessions: All data are backward-looking

To call a recession, economists need to look at the data they have in hand. Sure, data points such as consumer confidence are more leading indicators, but all the actual data that economists use tend to be in the past. With recessions and with investments, past performance is no guarantee of the future. The impact of backward-looking data tend to drive a “bad news is good news” mentality at times. Essentially, when all the news is bad it can be a very good time for investors to start buying. That’s because, simply, when you are at the bottom there is nowhere to go but up. When the data are so bad and sentiment is so horrible any good news can have an amplified positive impact. This of course is hard to call, but it is important to remember that once a recession is officially called, it is often already over.
Unlock Premium - Try 5i Free

These past 6 weeks remind him of a quote from Lenin: "There are decades when nothing happens, and then weeks when decades happen." Between tariff announcements and then reversals, and sudden intraday shocks and moves in the stock market and in currencies, it's been an extremely volatile time. It's very cloudy and confusing. His ETF research desk has been inundated with questions.

On the whole, he's not seeing the market retrench entirely out of equities. Money flows are split almost evenly between fixed income and equities. 2024 was a year of bull markets all the way, a record year for ETF flows both in Canada and in the US, driven mainly by demand for the Mag 7 and the S&P 500. 

There's still a lingering desire and wish for those growth stocks to continue driving as the engine for the economy. But we're starting to see branches of flows moving into low volatility equities and certain aspects of fixed income, as well as buffers and other strategies for capital preservation.

They're highly efficient, giving you incredibly diversified exposure to sometimes thousands of stocks all at once. Enormous liquidity. Market makers stand ready throughout the day to execute huge orders. Primary and favoured vehicle for large institutions that want to turn over billions of dollars on a dime. 

Incredibly low fees and very tight spreads benefit investors as a whole. Smaller investors can piggyback onto this world-class institutional liquidity built around the ETF ecosystem. People who've just sold their stocks often move into ETFs so that they can maintain some type of market exposure.

Buybacks are similar to dividends. A way for a corporation to return money to shareholders. The company just takes cash on hand from its operations and reduces their share count. The remaining shareholders see a little bit of a price increase and accretion of company ownership. It can insulate the share price from dropping or, controversially, to prevent large stock options from vesting. In theory, it's no different from a dividend.

Thing is, we live in the real world where there are things like taxation. Most investors would much prefer to see capital appreciation rather than income ongoing. 

You may find some if you search for "shareholder yield". Invesco partnered with some index companies in trying to understand shareholder yield as the core concept. Shareholder yield combines dividends and buybacks as the true signal for how companies return capital to shareholders.

Look in the US. There was one in Canada, but it delisted.

This goes to the heart of how these covered calls work. They hold a basket of stocks, and then just write call options for a little additional yield. If the underlying stocks experience any drawdown, you participate in that 100%. The extra premium yield you collect along the way does buffer you a tiny bit.

What'd you'd look for is some kind of put protection that offers some insurance against a downside fall. There's a whole slew of new products called "buffer ETFs", which have only 1-year time horizons or sometimes a bit less. They use both covered calls and put protection to try to neutralize the downside move. These are sophisticated products, so they're not for everyone. Instead, look at PYF.

For about 15 years after the great financial crisis, when rates were near zero, bonds had almost no return potential and only downside in the face of rate hikes. At that time, many investors just went to cash instead.

Purpose of a bond alongside your equities is for it to zig when the rest of it zags. If you have something with an appreciable amount of duration, with fortress-like capital (think US treasuries long term), ideally that part of your portfolio should go up in a big market selloff. Provides some ballast for the ride.

He meets many young investors who have decided to go 100% into equities; the long time horizon will work for them. Not so for retirees or those who are risk-averse. Investor, know thyself.

Difficult to manage what's happening because there's lots of uncertainty out there. He feels that a lot of businesses are holding off on certain capex spending, front-running some things to get ahead of tariffs. 

Still, markets have been pretty healthy. Since the April 8 lows, we're up about 13-14%. Generally, investor sentiment has been improving. Tariff tension is de-escalating somewhat. Seeing positive economic data and a pause on new tariffs. Steady job growth in the US is restoring confidence in the overall market.

US and China are going to start talks this week. While that's big news, he's not sure if it's more about de-escalation or about a deal. We'll see. In any light, it's positive.

Looking ahead, we have US mid-term elections coming up. The administration is going to need to get supporters back onside. Need to get the economy relatively strong, and get those votes; otherwise, they'll lose the House.

In a bit of a conundrum. Do they raise rates ahead of possible inflation, or are they concerned about an economic downturn? Right now it's stable, and the market's enjoying that.

Expects choppiness to continue. Out of the woodwork, we just saw tariffs on movies that are filmed outside the US. Geopolitical tensions around the world, political uncertainty. But when do we ever have blue skies and clear sailing?

He is constructively optimistic that, as trade tensions come down, we'll see markets slowly melt upwards.

Why It's Important to Save on Fees 

We’ve heard it a million times before, but even deceptively small fees have a massive negative impact on wealth. Investing $100k at seven per cent for 35 years will result in a tidy nest egg of almost $1.1 million. Tacking on an annual two per cent fee might not sound like much but would effectively cut your final balance in half. Financial services represent a 63 billion dollar industry in Canada—63 billion dollars from fees of various forms. There are a lot of well-meaning people working in it, but the fact is that the industry is built upon increasing their wealth, not yours. Saving fees by investing your own money might be the most important financial decision you can make.
Unlock Premium - Try 5i Free

Don't expect much from PM Carney meeting Trump today, but it's interesting Trump's change in tone after the Canadian election with the 51st state talk dying down. Will the tone between the two leaders be more cordial? Meanwhile, the US is losing its dominance--the US has had decades of trade deficits building that has been putting dollars into the hands of foreign entities which have bough US assets hand over fist. This has culminated in the greatest run in the S&P, from 2010-present. But this is starting to fray and unwind. Canada has poor energy prices, under tariff threats and high housing prices (though gold is hitting highs), but still, Canadian stocks are more in demand that US ones. The US stance on tariffs will lead to stagflation, which is a tough time to make money in markets. He likes utilities and infrastructure, which are export opportunities for Canada, and backed by federal leadership. LNG should be Ottawa's focus; the first phase of LNG Canada should happen later this year that he hopes leads to a decision on phase 2. He likes the nat gas space.