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

The question was on the impact of falling short-term rates on banks. He expects it to be good for banks and has shares in ZEB, the BMO ETF. Lower rates are a good sign and are better for borrowers and he would recommend the ETF.

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GIB.A is a leading global IT consulting company based in Montreal, and it largely provides business and strategic IT consulting, systems integration, and software solutions. In mid-2023, the company announced a planned investment of $1 billion over the following three years to support the expansion of its AI services. These investment plans include the expansion of its AI-related consulting services, intellectual property-AI enablement, global employee hiring and training, and operational excellence efficiencies. In late 2023, it expanded its partnership with Google to leverage Google Cloud and enhance the capabilities of its CGI PulseAI solution platform. Management noted in its most recent earnings that almost 80% of its clients are actively exploring AI technology.
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Believes large tech names have carried majority of market gains, and broader markets gains appear to have narrowed. TSX index not keeping up to performance of S&P 500 market cap weighted index. Interest rate cuts have not spurred performance in rate sensitive sectors within Canada. Over the medium term - presenting buying opportunity for real estate and other rate sensitive industries. Over the short term - expecting further pain in depressed sectors. Tech multiples are exceeding 2000's era multiples - however - would advise investors not to be too hasty on opinions. Quality tech names are generating cash flows unlike the 2000 era cash. 

Market Update:

The Bank of Canada officials discussed whether to wait until July to cut interest rates to gain further assurance inflation is still on track to reach the central bank’s 2% target. On the other hand, the Bank of England kept its main interest rate unchanged at a 16-year high of 5.25% even though inflation has fallen to its target of 2%, as policymakers are concerned a premature cut could fuel another price rise. The Canadian dollar was 73.00 cents USD. The U.S. S&P500 ended the week up 0.4%, while the TSX was down 0.5%. 

It was a mixed week of greens and reds. Materials rose 2.2%, while energy and industrials gained 1.2% and 0.2%, respectively. Real estate, consumer staples and technology all edged down by 1.7%. Financials slid by 0.7%, while consumer discretionary gave up 0.4%. The most heavily traded shares by volume were Canadian Natural Resources, Bitfarms, and Power Corporation of Canada.
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It's true. Everything on the surface seems absolutely fantastic. It's akin to when he goes hiking on the Scarborough Bluffs. You can look out and see this beautiful view and the lake, and everything looks amazing. But there's this fence with a sign saying "Don't go any further than here," because even though the ground looks stable, it's actually caving in underneath. If you step over there, you could fall. 

That's how he feels about the markets right now. The indexes keep hitting new all-time highs, but when you start looking underneath, the picture isn't quite so rosy.

He's been doing a lot of comparison of different markets and indices. Even within countries like Canada and the United States, you can get very different performance between large-caps stocks and small caps. 

Look at a chart comparing the S&P 500 vs. S&P 100 vs. Russell 2000. The S&P 500 has been trending up since October 2023. The S&P 100 has also been going up, but at an even faster pace. The more important one is the Russell, flat since January, but going down in the last month or so. People are dialing back their exposure to the small caps, and the gains are getting more and more concentrated in the big caps.

The S&P 500 is a market-cap weighted index, which means that stocks with the largest market caps have the largest weight in the index as well. Compare that to the equal-weight index, where each company has the same representation within the index. 

He considers them fellow travellers, most of the time they trend in the same direction. When you start seeing differences, that's a flag you always want to pay attention to. They were going in the same direction for about 6 months. Now the market-cap weighted is going to new all-time highs, but the equal-weight index has gone flat. This suggests that the gains are being concentrated in a small number of large-cap stocks, whereas the broader index isn't necessarily participating as much.

Dow industrials have gone to new all-time highs, but the other Dow indexes haven't done quite as well. Transport, in particular. For over 100 years, technicians have looked at Dow industrials vs. transports, feeling that the two of them should be fellow travellers. So if you get a new high in one, in short order you should be getting a new high in the other one.

This hasn't been the case more recently. Industrials hit all-time highs, and then dropped back a little bit. More importantly, Dow transports have levelled off. They haven't confirmed the industrials' new high, and they've actually started to go down.

A fair question. We've seen technology do incredibly well lately. 

But at the end of the day, most people want to go out and buy goods and services, and these have to be transported by truck or by rail. Or people travel for business or vacations on airplanes. Part of the internet economy is ordering things online, and those go through the courier companies. At some point, all these things need to get transported.

Looking at comparison charts, it's not unusual to see the S&P 500 outperforming the TSX. It has to do with the sector composition of the markets, rather than a country's economy. In the US, you have a huge number of big-growth companies. Tech, healthcare, consumer discretionary are the biggest sectors. In Canada, the biggest sectors are materials, energy, and financials, with industrial cyclicals being a smaller part of the market. 

So when you end up in these big bull runs where people are into growth, there's just more of it in the US and the US tends to outperform. When things go back the other way, or during periods when commodities are rallying, then the TSX tends to do better.

We're seeing this across the globe. While the S&P is reaching new highs Europe, in particular, has really rolled down. Big selloff after recent European Parliament elections, with turmoil ramping up. And China struggled for some time, just starting to bounce back.

Yes, TSX has underperformed, but the US has been this unstoppable train that has run over and demolished everything.

Two ways to make money on bonds. One is the coupon that you collect. The other is your movement in price upward or downward from when you purchased it to whenever it expires, at which point it's redeemed out at par. 

So if interest rates go up, and because the coupon is fixed, to get a higher rate from when you buy it to the end, the price has to be lower. If you're paying up, then you're willing to take a bit of a loss on the price in exchange for a higher coupon rate. Part of your return comes from the coupon, and part comes from the increase in price.

If interest rates go down, then investors are willing to take a lower rate because they're paying up. 

We've had one rate cut, but investors are likely waiting to see how many more there will be in the near term. Just one or two, or a prolonged campaign of cuts? And people don't know yet, especially since half the central banks have cut and half haven't. So they're waiting for more confirmation before they get more conviction on those names.

Certainly a possibility. Seasonally, June historically has been a softer month for markets, and then historically July sees a bit of a bounce. From the middle of August and the end of earnings season to mid-October is usually the weakest and most volatile time of the year for equities. We're in a US election year, which could also add to volatility and uncertainty.

Markets are still looking good. Some areas are a lot stronger than others, and we're heading into a season that's traditionally more volatile.

So far, so good, where the 4th year of a presidency heading into an election is strong for markets. So far this year has been similar to 2012, when Obama and Biden ran for re-election. At that point, markets did a 1/4 pause and 1/4 negative, alternating. And this is what we've seen over the last number of months.