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

The DRIP is more about your financial circumstances and where you are in the life cycle of your wealth.

If you are a younger investor and don't need the income to live your life, the DRIP is perfect. It allows you to buy more shares in a company you really like by dollar-cost averaging every quarter. But if you need the dividend to live your life, then the DRIP is not as useful.

Sometimes when he talks to fundamental analysts, they say that things are overvalued. Reality is that you can't fight the tape. Right now, the market's making higher highs and higher lows, new highs, and above the 200-day moving average. 

Even if you look at the internals, market breadth is no longer all about tech. The momentum trades are not overly overbought. Sometimes even market sentiment can send out a signal when people get too boisterous, but it's not.

It's really kind of a Goldilocks time from a technical perspective. The only thing wrong is valuations, but don't argue with the tape.

He uses weekly charts to do his macro analysis. Standard stuff like MACD and RSI. Sentiment indicators like the put/call ratio, VIX. Put/call, for example, is roughly in the middle of its range. Nothing is screaming at him that says we should be worried too much from a technical standpoint. 

A fundamental person would get you all scared, but when the market's going up you have to be invested.

Definitely important, but not the only factor. Right now, seasonality is positive for the next 6 months. December, in particular, can be very good. 

He likes a 3-year chart, as it gives you a more complete picture of the story. Your view can change when you take a longer perspective than just 1 year.

His business partner is the fundamental guy. Their firm is driven by fundamentals, but at the end of the day you don't fight the tape. They won't buy a company that doesn't have a decent chance of earnings growth or a catalyst for it to go higher. Must have a decent balance sheet. Also doesn't like overvalued stocks. His firm's called ValueTrend for a reason.

Fundamental analysis will often steer him away from plays that look good technically.

Yes, the momentum indicators may be slightly different. RSI on a daily chart is 14 days, which is a big difference from RSI of 14 weeks on a weekly chart. He tends to use weekly charts for most of his work, relying on the daily charts to refine his entry or exit points. 95% of his thought allocation is to the weekly charts.

Likes it. If he remembers correctly, gold's seasonality is around the end of the year, but then has a more positive summer season from July-Nov/Dec. You can see how the latter part of the year's been very good for gold. Glad to see the pullback, as it provides an opportunity and takes out the overbought position. Might go sideways for a while.

Typically, but best seasonal trends come when September and October are inherently weak. We didn't see that. In the case of an election year, there's some relief around the post-election period and we've already seen a lot of that. 

When you listen to what's coming from the street, that they're going to tighten up their year-end targets, generally they're moving a bit higher. No one was forecasting a 6000 S&P target 3-12 months ago. Markets have surprised to the upside, and the street is playing catchup.

The question is, how much more is left? An awful lot of positives are priced into the market, but as long as there are no negatives there's no reason for people to sell and run. 

We pretty well know who Trump's cabinet's going to be, despite some approvals needed by the Senate. Absent any dramatic moves, the market's quite satisfied with the slate overall. Especially now that we know who's in Treasury.

Powell and the Fed think they have inflation under control, but the data will present differently. Stock market's at all-time highs, so why are they cutting rates? Yeah, inflation's come down, but the last few inflation prints are up. If PCE comes in at the core a little hotter than expected, those are the kinds of things that will upset the apple cart and prompt investors to want to take a bit off the table.

Managing inflation certainly doesn't mean cutting rates, but the Fed doesn't want to raise rates either. Economic weakness will define when the next big period of market unrest is going to come.

More pressure coming on the yield curve side. He's a bit confused as to why, but thinks it might be short-covering driving rates coming off their worst levels. There's a high probability we'll test the extremes of what we've seen in the last year or two. This means the long end of the curve would get a lot closer to 5% than it is today before things settle in.

Next quarterly funding announcement, which is where the Treasury tells us what the composition is, is going to be headed by Bessent instead of Yellen. We'll see if there's a change in policy with the issuance between bills and coupons; with more coupons, there's far more normalization of the process. More coupons mean longer duration and more competition with equities and other assets. Higher issuance of bills, as under Yellen, makes financial conditions easier. 

When you go for high-dividend payers in Canada you get the banks, insurance companies, pipelines, and some of the energy names. Yield will be a bit over 4%. A nice way to play.

Vanguard, iShares, and BMO all have offerings, but they all do it slightly differently. BMO has a covered call version, ZWC. There's ZDV, XDV, VDY. Take a look at them all and see what you like. All have different weights to the components. They're all equally good.

Trump effect

Now that we know who Trump's troops are, Larry's gone back to markets of 2017-18 to see what was similar or different. He pulled up a chart of the S&P 500. The rally for most of 2017 was mainly about the excitement of tax cuts coming, making companies more profitable. When it actually happened, markets went a bit higher, but then 2018 was pretty much a down year for equities. A lot related to tax cuts was already priced in in 2017.

What can we expect now? Reality is they're just talking about extending what Trump already put in place. So not much of anything new is going to happen. Bessent is a fiscal conservative. Doesn't think additional corporate and personal taxes are going to get through Congress, even given the Republican sweep. This time around there are a lot of fiscal challenges that there weren't before with the debt and the deficit. The more he cuts taxes, the more financing they need for deficits. The bond market won't like that, and eventually equity markets will care.

Not sure we can say that 2017, the first year of the presidential cycle, will be repeated in 2025. Far more likely to be a very choppy market like 2018. Fewer regulations will be great, but not much to look forward to beyond that.

As for Fed policy and inflation, we've had the ramp up in markets. Because of that, growth and inflation will be stronger than expected next year. This will limit the market's ability to get tailwinds from easier monetary policy. Harder for the Fed to cut rates. 

2025 will be a lot more like 2018 than 2017. Choppy and volatile.

Tax Loss Selling:

2024 has been a very solid year for the equity markets due to a favourable macro backdrop of declining interest rates, a slowdown in inflation, and especially after the election results, where the markets expect Trump’s policies of putting America first can help corporate earnings over the next few years. As a result, not only broad market indices but risky asset classes, such as small-cap, high-growth stocks, cryptocurrencies, etc., have performed strongly and hit new record highs.

That being said, despite a record year where both the S&P 500 and TSX achieved double-digit returns, not all sectors performed well, and there are some corners of the market that have been under pressure. These are where investors can take advantage of their temporary “losers” by claiming capital losses for tax-loss selling, which could offset capital gains.

This strategy can be accomplished by simply selling a temporary losing name in a non-registered account, which could then be used to offset the net capital gains tax investors have on their investments. The unused amount of capital losses can be used from up to three years in the past or carried forward indefinitely. After 30 days of the sale, these holdings can be bought back if investors believe in the long-term fundamentals of these companies.

Although writing off good companies based on one year of bad performance could become a regret for many investors, some of these names that have been under pressure may continue to see underperformance over the long-term. During a bull market cycle, we think investors should respect the wisdom of the crowd. Therefore, investors need to evaluate these names for future reinvestment on a case-by-case basis.
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