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

So far, so good. We'll see once the other of the Big 7 names report. GOOG got things rolling nicely last night. Broadly, 250-260 of the S&P 500 constituents have reported Q3 earnings. We're seeing earnings on average up high single digits, pretty good all things considered. By and large, companies are reporting better than expected results.

Canada is still in early days, with only 10% of TSX constituents having reported. But early results are showing a more difficult earnings comparison. Canadian companies, in aggregate, are lagging US counterparts this season.

Both candidates are running broadly similar campaign platforms from an economic standpoint, very fiscally undisciplined. From a stock market and corporate earnings perspective, that's going to be pro-growth if they run big deficits and stimulate the economy with fiscal policy. Good for growth, albeit at the expense of long-run, fiscal sustainability. A kick-the-can-down-the-road approach. 

Medium term implication probably that inflation will be higher than it was, as well as interest rates. After the election, expects a lot of anxiety to dissipate. There's a lot of speculative positioning in the options market with people putting on hedges.

The election will come and go, hopefully peacefully and quickly. And then we get into a seasonally strong period in December, which should sustain the very strong rally we've had so far in stocks through to the end of the year.

The top ten names with the highest dividend growth rate in the last ten years:

In order to seek those life-changing stocks, we think investors need to look back before looking forward. Here is the top ten Canadian stocks with the best 10-year track record of dividend growth.

ELF           E-L Financial Corporation Limited    41%

QBRA       Quebecor Inc.                                   37%

GSY          goeasy Ltd.                                       27%

QSR         Restaurant Brands International Inc 25%

PRVUN     Pro Real Estate Investment Trust     23%

ATD           Alimentation Couche-Tard Inc.         23%

GCGA       Guardian Capital Group Limited       21%

CNQ       Canadian Natural Resources Limited 20%

CCLB        CCL Industries Inc.                           20%

WFG         West Fraser Timber Co. Ltd.            19%

Ten years is a long time, and it is a respectable record to study. Although the historical track record does not mean these companies would continue to do so in the foreseeable future, it could be a starting point for investors to look for ideas. The list above already includes some of the high-conviction names in our model portfolio, including goeasy Ltd. (GSY) ; Alimentation Couche-Tard Inc. (ATD); Canadian Natural Resources Limited (CNQ), and CCL Industries Inc. (CCL.B). We think the probabilities are high that these names will continue to do well for long-term investors five or ten years from now. 
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Company Highlight: Real Matters Inc. (REAL)

Real Matters Inc. (REAL) stock price was up 20% on the month, 45% year-to-date, and 48% over the past year. REAL continues its impressive run over the last year and was last mentioned in the August edition of this blog. The stock has a 52-week range of $4.43-$9.46.

REAL operates in the real estate appraisal and title service industry in North America, the company plays an essential role in the value chain of the real estate market by helping mortgage lenders reduce the risk of lending and meet regulatory requirements. In addition, REAL also provides insurance inspection services by ensuring all the historical and current owners of the property are taken into account during the due diligence process, maintaining transparency between buyers and sellers. REAL generates revenue by providing local knowledge and expert opinions on the fair market value of a residential property.

There was no company specific news that drove September’s share price gains. REAL continues to be highly sensitive to rates and the housing markets. With the US making their first rate cut in September, this likely improved investor outlook for housing market activity generating investor optimism around REAL.
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Many US companies have reported and in 2 weeks even more will, so we will get a good sense of the US economy and what the companies forecast. Meanwhile, there's economic data and the US election. He expected markets to be a lot more volatile. The market seems to be banking on Trump winning, though polling says it's tied in several states. It's close. Same goes with the House, also close. Trump is seen more inflationary than Harris given tax cuts and tariffs Trump wants. Earning season once again will see tech dominate, reporting most of the gains.

Last spring, he's moved his asset mix into private credit and private equity like Blackstone. The latter are less volatile and less tied to the market. Pension funds have 50-70% of assets in private securities. It depends on your need for liquidity, which isn't readily available each day under this strategy.

The Canadian dollar will get weaker, before it gets stronger, because our central bank has been more aggressive in cutting interesting rates than the US, and he expects this to continue, 25-50 points by year's end vs. 25 in the US. Also, weaker oil prices will make the CAD weaker down to 70 cents in the next 6 months. But after that, you will like the Canadian economy more.

What happened in the last decade in bonds won't happen going forward. The world be slightly more inflationary going forward, but nowhere as bad as post-Covid, like 2.5-3%. There will be government deficits (a major problem), so there will be a need to finance that debt. The 60/40 portfolio no longer works. Look at XBB. Today, the best you'll earn in a bond portfolio is 3-3.5%; you have credit risk and capital risk of inflation. Not bonds, but private credit will give a much better fixed income return for the next decade.

In an election year October can be more volatile than usual and there is potential volatility in the next few weeks. Retail investors are bullish and that historically is a bearish signal. The VIX is trending up and the market is trending up at the same time and that's unusual. Institutional investors are reducing their exposure to stocks so the the retail and institutional groups are diverging. We are just tipping into bullish sentiment but if it goes really deep then that is a reliable signal.

The caller was wondering if we are at a market top and should we use daily or weekly charts to determine if there will be a market top reversal. This involves macro analysis which he a does a lot of. He uses weekly charts and the 200 day moving average. Look for higher highs and higher lows in the weekly charts. As soon as the last low is taken out and there is a break of the 200 day moving average it is a strong indicator that the former trend will turn into a base or a downturn.

Rotation from "Mag 7" into small cap stocks happening in USA & Canada. Institutions are moving into Canadian small cap stocks, which have started to out-perform. Expecting this trend to continue. Finding small cap stocks that are setup for 30%-40% gains (trading at single digit valuations). Traditional valuation metrics apply, but larger pools of capital usually don't invest in smaller companies. Lower interest rates should be helpful to small cap stocks (less expensive to service leverage). 

September Market Update:
The TSE Index was up 2.8% in the month of September, up 14.51% YTD and 22.82% over the past year. Canadian GDP was up 0.50% in the third quarter of 2024 and 0.90% for the full year; in the USA the GDP was up 3.00% in the third quarter and 3.00% for the full year. The Canadian inflation rate was up 2.00% annually and the US inflation rate was 2.50% annually in September 2024.
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He believes so. We're now into the second year of a bull market, from when the market bottomed in October 2022. Looking back even further to 2019, we've have a global pandemic that shut down the world, Russia-Ukraine war, Middle East conflict, highest inflation since 1980, and the highest interest rates in many years. If he told you that the S&P 500 would double over those 5 years, you'd have thought him crazy. But that's exactly what happened.

What does that tell you? Focus on fundamentals, try to ignore the noise. And the fundamentals are pretty good. We're at record highs because the earnings of the S&P 500 companies have been tremendous, primarily from some of those big techs. Now we're in the part of the cycle where interest rates are coming down, with more to come from both Canada and the US. Inflation has come to a normalized level.

What will get us over the hump for more record-level performance is earnings, earnings, earnings.

Yes. Look at the gigantic move today by TSLA, which had a very low bar going in. A lot of big numbers will start coming out next week when we get some of the big techs. So far, so good.

He sees it as a continuation of more of the same from the beginning of the year. Companies tied to housing, the low-income consumer, or transportation are not doing as great, but most expect things to pick up. It's not that things are so bad, it's just that things were so good for a lot of those companies in 2020-2021, it's hard to find what the normalized level is. Companies like TFII, CP and CNR had good results, but not good enough given how strong the economies are.