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

The S&P, he thinks, will go higher, and you should play the market from the long side. We will continue to see strength in semis and megacaps.

Company Highlight: Shopify Inc. (SHOP)

The second-best performer of August was Shopify Inc. (SHOP) whose stock price was up 18% on the month, down 3% year-to-date, and up 23% over the past year. Needless to say, SHOP has been very volatile over the last year, appearing as one of the biggest losers over numerous previous editions of this blog. The stock has a 52-week range of $63.16-$123.20.

 Shopify (SHOP) is a leading global commerce company that provides essential internet infrastructure for commerce, offering tools to start, scale, market, and run a business. SHOP has transformed since inception in 2004, initially as a platform to help small businesses set up online stores. SHOP now provides all types of merchants with an all-in-one solution spanning a multi-channel front end, a single integrated back end, and infrastructure for data-informed decisions.

 After numerous months of SHOP’s shares being under pressure, the stock recovered with a big August. We had previously highlighted how some of the first quarter reaction was overdone and expected a recovery. Second quarter results released in the beginning of August were strong, guidance was upped, and many of investor concerns were shaken off. The stock jumped almost 20% the day results were released, and we are positive in our SHOP outlook.

For the quarter, SHOP reported EPS of 26c beating estimates of 20c and growing from 14c in the year prior. Revenue was $2.05 billion growing 21% (or 25% adjusting for the sale of the logistics business) year-over-year and beating estimates of $2.01 billion. Gross profit dollars grew 25% to $1.0 billion. Gross margin for the quarter was 51.1% compared to 49.3%. Free cash flow margin was 16% compared to 6% a year prior. Growth was driven by higher GMV, increased merchants, and increased penetration of Shopify Payments while profitability continued to expand.
Unlock Premium - Try 5i Free

A lot of capital has fled Canada to invest in U.S. AI, because there are few Canadian places to. Rates are falling and risk appetite is rising. Stock mispricings are rare and don't last long, but he looks for mispriced compounders but offer long-term growth. Often, they are take-out targets, because they are mispriced. He avoids resource stocks because they don't create value in the cycle and they misallocate capital; resources are a trade, not investment. Has no idea where oil prices are going.

Market Update:

The TSE Index was up 1.02% in the month of August, up 11.39% YTD and 15.05% over the past year. Canadian GDP was up 0.50% in the third quarter of 2024 and 0.50% for the full year; in the USA the GDP was up 3.00% in the third quarter and 3.10% for the full year. The Canadian inflation rate was up 2.50% annually and the US inflation rate was 2.90% annually in August 2024. With this background, the following Table presents the highest and lowest performers for the month of August 2024.
Unlock Premium - Try 5i Free

He thinks so. The debate is to be had, for sure. It's come down considerably, but the core is higher than the Fed would like to see. Softening employment number on Friday is a bit of a concern for the market. To really crush inflation, you have to get wage demand down and that's not going away anytime soon. Going to see persistent demands for higher annual increases from employees, which will keep core inflation stickier and higher than we've been used to over the past decade of very low inflation.

For the last 30-40 years, we haven't had to worry about inflation in a big way. Going forward we do, and it matters a lot. Less globalization is one cause. We get some more numbers this week. If they're benign, equity markets will like it; if they surprise to the upside, look out for more volatility in equity markets.

Here's the debate. You get some good news, the Fed says positive things, and the market can rally off that. But as soon as you get a hint that the economy may be slowing down, especially on the labour side, that's when the end of the business cycle risk really kicks in. That matters for earnings, and markets are priced for perfection right now.

Broad consensus right now is that we're all good. But he looks for the worst-case scenario, because he wants to manage risk for clients off that analysis, rather than the most optimistic one.

With the end of the business cycle, the yield curve is starting to steepen. This means higher net interest margins and higher profitability for the banks. That's the trade, but how long does it last before a hard economic landing would necessitate higher loan loss provisions?

A trade now. You can buy the dips, but chasing these stocks higher makes no sense. We're not in the clear economically, by any stretch.

Recently, we saw yields go up and then invert, where the short-term rate is higher. Historically, that tells us of the likelihood of a recession. They have to slow the economy and fight inflation, which we saw the last couple of years. Now the expectation is for the easing cycle. 

The reason the yield curve inverts is to slow things down, and we're starting to see that slowdown. But there's this concept of the delayed transmission of monetary policy. Takes a long time for loans (such as mortgages) taken out a while back to hit their reset dates. 

By the time central banks actually start cutting, it means the economy's already sliding. So you're at the tail end of the business cycle. That's typically not bullish until markets price that in, and they haven't yet. This cycle's very different from previous cycles, mainly due to the upheaval of Covid where everything shut down and governments give everybody money.

We haven't had to worry about inflation, and now we do going forward.

Trump will have better corporate tax policy and better individual tax-cutting compared to Harris. But the impact will be far worse for deficits going forward. This matters a lot. Because it's such a close race, this adds a lot of uncertainty over the next 2 months.

As always, it will come down to a couple of swing states. Most important one and closest race is Pennsylvania. US Steel takeover is a big focus there. It almost doesn't matter who wins the presidency, because tax policies get voted on by Congress. Whether we see a blue sweep or a red one, what does that mean?

According to polls, slight tilt now toward the GOP in Congress. Slight tilt toward Harris as President. Senate looking to be Republican. Likely going to be a split outcome, which is actually the best for equity markets based on the last 70 years. Until we get beyond the election, it really matters.

For the individual, everybody gets a tax cut under Trump. But do the top 10-20% need it? Vast majority of spending in his package will benefit the rich, by far. For Harris, the top 10% will pay a bit more, but the bottom half will be way better off.

At the end of the day when all's said and done, he thinks Harris will get the nod.

What does all this mean for equity markets as we head into the next couple of months? We've seen added volatility in markets since about mid-July, when Harris entered the race and Biden left. Favourable inflation numbers, but weakening labour situation. Worry in first days of August with Japanese carry trade, they changed policy, markets rallied but could not make a new high. 50-day MA was broken on Friday. Need to test support before we can rally, and support is about 3-4% below where the S&P 500 is sitting right now. Very high probability of testing that between now and the September 18 FOMC meeting.

If Fed does 50 bps, and is really worried about the economy, support will break and we'll come back down. If they do 25 bps, suspects we'll see a bit of a bounce, but ultimately don't expect new highs until US election results are in. Market's in a holding pattern, with volatility, between now and election day.

She believes the S&P is peaking and grains (agriculture) are seeing a lot of negativity. A very unusual confluence that could lead to a short-squeeze in the grain complex.

Since 1950 the S&P has been down in September about 60% of the time. The average amount in the last few years is 6%. Rate cuts in the U.S. are coming, probably 25 basis points at a time. This should introduce a bullish sentiment which was not the case last September. If the rate cut is 50%, this would cause concern about recession. Dividend stocks which got hid hard over the past couple of years are coming back as rates come down. Lower rates are also a lift for utilities and pipelines.

He predicts the US Fed to cut interest rates by 50 basis points this month (the street thinks 25-50), and prolonged economic weakness for the next year, but not a recession.

Believes recent under-performance in tech due to sustainability of A.I. spending, and ability to continue to generate increased profits. However, if tech companies continue to deliver, performance will continue. The recent market volatility has created opportunities for investors to invest in quality names. Earnings expectations and stock multiples will be most important factors impacting stocks in the next few months. 

Company Highlight: Boralex Inc. (BLX)

BLX is a Canadian developer, owner, and operator of renewable energy power facilities in Canada, France the United States, and United Kingdom. BLX has been working in renewable energy for the past 30 years and has a workforce of over 790 people. The company operates primarily across three types of renewable energy: wind, solar, and hydroelectric (including energy storage). It has 102 Wind Farms, 13 Solar Power Stations, 15 Hydroelectric power stations and 2 storage units. This gives the company an installed capacity of 3,133 MW across 132 sites. BLX has 264 MW under construction expected to be commissioned in 2024 & 2025, and a pipeline of 587 MW.
Unlock Premium - Try 5i Free

Yes. We're all about being as conservative as we can, especially in a market like this. Focus on returning as much of the return as possible up front in the form of dividends, so not relying as much on market-price return. We don't know if the market's going to be up, down, or sideways. But collecting that dividend, and reinvesting and compounding it, provides a good stable base. Any market return they get on top of that is a bonus.