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

In the morning, he looks at the Wall Street futures. Are people in a good or bad mood? The TSX and S&P are at highs now; the U.S. has been cutting rates so close to the election, which is odd. Inflation is probably here to stay, given sharp raises for longshoremen and pilots. He fears if Canada cuts rates faster than the US, the CAD can fall below 70 cents. Oil prices will spike if the Middle East situation continues to deterioriate. Will Iran's supply be cut off?

REIT Investment Outlook

REITs have been a struggling sector in the market over the last few years as high rates have pressured margins and growth capabilities. As we enter a rate cutting environment in Canada, the future outlook for REITs is much more positive than in years past. XRE and ZRE are two viable options for interested investors. ZRE has the performance edge in recent years, while both funds are highly similar outside of that. The decision for investors should come down to if one wants equally weighted exposure or market-cap weighted exposure. Given how weak recent performance has been, we think that XRE may benefit in future years. As rates come down, larger players who have more leverage and will benefit, while raising capital to fund growth initiatives will also be cheaper. This will likely have a greater benefit on the cap weighted portfolio of XRE. We think either option is solid for Canadian investors looking for exposure to REITs, but we would give slight edge to XRE today.
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General direction is down, though it will be a bit sticky and choppy at times. Inflation is last year's problem. It will bounce around 2-3%, but we're in the right spot.

We've talked a lot about markets being resilient this year. The new word might be "defiant". Forget that September's typically in the red, the market's up. October before an election is usually tough, but it's not bad so far.

That said, since 1992 there's an average 2.5% drop in markets in October during US presidential election years; 63% of the time, markets are down.

Agreed. You need to be very selective as to what areas you want to be in. With the mega-caps being such a big part of the S&P, and showing the valuations they are, no doubt that the S&P as a whole is kind of expensive.

Revenue and sales will be more in the single digits. But the bottom line looks pretty attractive. For the S&P 500, seeing ~14% earnings growth for 2025, and ~10% for 2026. Investors will focus on those lines.

Getting very selective. He's trimming as things have gone up, but not exactly lightening up.

Tech sector in Canada is limited to a few names such as SHOP. When institutional money moves, it's going to go to the mega-cap names in the States. Names like CLS and OTEX are not that well known around the world. Canadian tech stocks have done well, but not as well as those in the US, and it's just due to flow of funds.

Normally as we leave September, we come out on a bit of a weak foot. We're not doing that right now, but we'll be talking about some weakness underlying even a great day like today. A bit of volatility, expectation of volatility, and some divergence in some of the indices. Even though the indices are going up, some of the deep-down indicators are actually weakening.

With seasonality, there's usually a bit of a dip in early October. Then things go flat to up, ending with a dip at the end of October. In a 4-year US presidential cycle, where we have an incumbent president (even though he's stepped aside), markets tend to get much weaker as we head into an election. It's usually because promises are made, and the market's doubting whether they can be kept.

With all the weakness expected, the bond yield is ratcheting up. The Fed and business leaders are coming out saying rate cuts going forward should be less, not more.

In a normal pattern, we weaken from September to early October, and then there's another fall. But in an election year, we get a much deeper drawdown at the end of October, and then a market runup as normal afterwards. You want to look at long data, as anomalies in a 2-5 year range can easily happen. Even still, the data doesn't tell you how big these moves might be.

There are other indicators to look at besides the usual charts, such as moving averages and MACD and relative strength. It's these indicators that are showing weakness. That's what he means by divergence. The market's making new highs, but these indicators are trending downwards. You start to get more of the lifting done by smaller and smaller stocks.

In the last month, we've had a resurgence of the growth profile such as in the NVDA's of the world. So we're seeing divergence, but it doesn't mean that we're expecting a large correction. There's definitely a pause in place, which means there's probably a better time to make a large commitment to the market, sometime in the next month.

Interest rates falling did give all the players a bump up. But then rates have risen in the last few weeks, hitting what was previously a stalwart sector. Whole sector's under pressure. Better places for you money until you see some sort of basing.

ETF Highlight: iShares S&P/TSX Capped REIT Index ETF (XRE):

XRE is designed to provide exposure to diversified basket of Canadian REITs. It is benchmarked to the S&P/TSX Capped REIT Index. It is a capped ETF, so holdings are market cap weighted up to a certain upper limit. As a result, top five holdings include: CAR.UN 16%, REI.UN 11%, GRT.UN 9%, CHP.UN 7.6%, and FCR.UN 7%. By sector allocation, the top five includes: Retail 40%, Multi-Family Residential 30%, Industrial 16.6%, Diversified 5.5%, and Office 4.8%. XRE’s portfolio spans 16 Canadian REITs.
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Real estate has performed poorly the last 10 years. 2016-18 saw Trump adopt a growth-on mentality that allowed tech to take off, but at the expense of real estate stocks. Then, RE rebounded only for Covid to crush it in 2020--will people go to the office or mall again? But then, markets invested in data centres and cell towers for a year or two. Then, high interest rates crushed that rally in 2022. Now, the good news is an easing cycle in rates which will feed the appetite for RE stocks.