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

The US administration wants to maintain US superiority on a global scale. So they'll have to invest domestically in critical industries such as manufacturing, defense, infrastructure, and cybersecurity.

Really have to make sure you pick the right spots. Companies that are exposed to the US economy, but not as much on the tariff front, stand to benefit tremendously. So you really have to understand a business's fundamentals, US exposure, and whether it qualifies for the Buy American Act.

There's been a broadening of market participation over the last several months. Overall, if you look at small- and mid-cap equities (his specialty) in North America, for example, there are a lot of mispriced securities. Especially on a risk-adjusted basis, there's more clarity with the Republicans controlling the White House, Senate, and House -- a trifecta effect.

Canadian banks have had a good run. At this point, you have to be a bit more careful investing in them as a group. As well, going back to the US election, we'll have to see how some of the US operations are impacted. We saw the big fine imposed on TD.

As a group, he'd be more cautious.

He's probably less bullish than most. 

Stocks are at all-time highs, so valuation is an issue. Most of the move in the last year has been a valuation increase, rather than an earnings increase. He'd rather see earnings support. He's a bit concerned about earnings growth going forward. Double-digit earnings expectations are built in for next year, seems somewhat aggressive to him. Ex-
technology, earnings growth has probably only been about 2-3% overall.

Another things that people are being presumptive on is interest rates and how much support they'll provide for the market. Expectations for cuts have come down. Policy is maybe not as tight as the market is anticipating. He'd probably say now that the neutral rate is higher at 3.4-3.5%, which means a shorter and slower path for the Fed to get there.

Inflation is really getting sticky. Core is in the 2.5-3% range. And given some of the potential policies we're hearing from the new administration, and massive fiscal spending, inflation is more likely to flatten out or start to increase again.

There's a real bifurcated US economy out there, and you can see that with the retailers. The low-end consumer is having difficulty because inflation, especially food inflation, has been a bigger problem for them. The higher-end consumer has done well -- values of their homes and investments have gone higher, and $$ in the bank is now getting 4%. 

Sentiment is very bullishly high, so that's a problem. What's most important to him is the positioning. The average investor has a standard balanced portfolio of 60/40 -- with 30% Canada, 30% US, and 40% bonds. If you haven't done anything in the past year or two, you're way out of line with that and you should be looking at some selling. He doesn't see that happening.

The average equity holding right now in the US is over 70%. It's gone higher, but people haven't taken their profits, and it would make sense to do so. People should be rebalancing periodically. Now is the time to shift things around.

He's been lightening up in areas like bond proxies. If he's less bullish on interest rates, utilities and some of those that have done well may not do as well going forward. Financials and consumer stocks have done well this year, but for him there's a positive feedback loop feeding this. Consumer's bullish and spending a lot, and banks are doing well, in large part because the stock market's going up. 
 
There are a lot of headwinds, and everyone seems bullish. They're positioned too aggressively, and that's a time to be more cautious. He's been through enough bear markets in his life to say that it's a time to lessen your risk profile. At least rebalance, don't be more aggressive than you typically are.

Concerned about semis in general. SMH ETF is down over 12% since July peak, and hasn't recovered the way the rest of tech has. The cycle's rolling over. Semis are the cyclical portion of technology. They do well when demand is exceeding supply, but then supply catches up and prices crash. Margins then come under pressure and growth slows down, so earnings expectations have to come down.

They go through those cycles, and that will never change. Thinks we're near the end of the cycle where demand exceeds supply, except for maybe a few of the AI infrastructure chips.

Nice thing about the sector is that once you get the capital costs out of the way, the operating costs aren't that significant. Input costs of wind and sun are nothing. There are, of course, maintenance costs. They become very strong cashflow generators, which will come back to shareholders.

You have your high-impact and growth-oriented portion for trading. Other areas where you have good value, but you need to patient as it works out. Some Canadian energy stocks fit the value bill very well right now.

Normally, yes. You get the Santa Clause rally and the late-year seasonals. Typically, they're magnified when you have a substantial amount of weakness in September/October, which we didn't see this year. He expects the performance to be somewhat muted. 

US employment numbers. He's said that the thing that will upset the market's apple cart will be the real economy starting to sputter. We saw signs of that in 2024 where initial claims went up here and there, or payroll numbers were slightly softer, slight uptick in inflation. But there really hasn't been a lot of follow-through. 

That's what it will take for equity markets to have more of a correction than just the 1-2% dip we've gotten used to and that everyone can handle.

That's one of the things that can keep you up at night. What's Trump going to do this time? With the people named to cabinet positions, he's pretty serious this time around. Looking to break the system and change it with his America First agenda. While everybody discounts him and says it's just his style, this time around the impact is going to be more material than last time. 

It's been stronger than expected. You could look at that and say "Goldilocks", because it hasn't weakened yet. That's where we are right now, so there's a balance between still getting jobs growth with inflation that's come down and is not going back up. The best of both worlds.

But it doesn't mean that we will continue to expand the market multiple. It does mean that we shouldn't correct a significant amount. And when we finally do get that economic weakness and/or significant uptick in inflation (because the economy's stronger than expected), that's where we can expect some more problems in equities.

You're never going to see a private with the same benefit as a public ETF, virtually impossible. You're earning a less-volatile, premium income (called the "illiquidity premium") and giving up some liquidity.

He tends to be more of a trader than a very long-term investor. But he looks around the world and asks what's relatively cheap compared to a lot of things in the market that are very expensive? He looks at Warren Buffett, who is holding a lot of cash right now.

Whether the correction for the broader markets comes in a year, a month, or 3 years, he doesn't know. But Warren's building this massive cash pile to take advantage of at some point. So that's Larry's mindset. He wants lots of dry powder as he looks for companies where there's relative value.