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

We are seeing the market take a bit of a pause, as it resets and determines which direction it's going from here. After a strong recovery, things aren't pulling back in a big way. But investors are starting to look more carefully at what comes next. Where will the next leg of returns come from?

In the US, major indices are finishing a bit mixed. The real story she's seeing is under the surface. Leadership keeps shifting. Energy, AI, and tech names are holding up well. Consumer and rate-sensitive areas are easing.

At the beginning of the year a lot of people took profits on tech names to rotate into value. The peak-to-trough selloff in March was ~9%. What carried us out of the recovery was growth.

She's not surprised to see growth continue to do well. However, having a diversified portfolio (including exposure to value) is prudent. Great environment for more active management, as she expects more volatility ahead.

As expected, both the BOC and the Fed held rates.

She's certainly monitoring oil. Its move above $105 is now front and centre because that can feed into inflation. Canada is still an energy-heavy country, so that makes it harder to determine the path of rate cuts going forward.

At the beginning of the year, markets were anticipating 3 rate cuts out of the US. Now we've gone down to 0. To see US rate cuts on the table, we'll need to see energy and oil pull back.

She expects a short-term blip in inflation, which could cause some panic and volatility in markets. Once we get through that short period, we could see inflation pull back down, which could possibly put rate cuts back on in the US for the second half of the year. It's a matter of wait-and-seeing the economic data to determine what impact closure of the Strait has had.

There's history that always rhymes, and there's human behaviour that always repeats. That's what's happening here.

Investors were concerned about the conflict and what that meant. They then shrugged that off and started to look at what individual companies were doing. So far, earnings that have been released have been very strong. As a result, confidence just comes right back into the market.

That's where a lot of the strength has been in this recovery. Looking at advance/declines over a 10-day period, we've seen it go from a low to a high. When that happens, it speaks to very strong returns over the next year for that sector.

Fairly broadly. Technology is one of his largest exposures. He has industrials and some energy, as well as some special picks to round out the portfolio.

Brought metals down a fair bit. January was dominated by metals names. As earnings have increased in other areas, metals fell back in his rankings. For example, January had 17-18% precious metals exposure; he's now down to ~7%.

His firm runs a top-down process, which leads to picks in offense, neutral, or defense. Certain indicators are applied to the choices. They went to neutral back in March, and then moved to offense in April.

He watches the indicators closely. When they change, he adjusts the asset allocation by reducing equity exposure and increasing his cash position.

This is the first year where we've seen publicly traded real estate really outperform the broader markets. The question is why?

There are some tailwinds to property fundamentals. Falling new supply, as new construction has really fallen off a cliff ever since interest rates spiked. They have access to capital, which is in stark contrast to the liquidity crunch in private credit markets. Offer resilient cashflows, meant to be beneficiaries of inflation. M&A is alive and well.

Finally, we came into the year with the widest historic earnings multiple spread between US REITs and the S&P 500. That setup was last seen after the dot-com bust. REITs then went on a 7-year run, outpacing the S&P. 

Tech is easy to own, and we're in one of the most exciting times with prospective growth in AI. It's easy to look at the real estate market and paint it as not exciting.

But we're definitely seeing a rotation from growth to value today. Not only do the US names present value, but they have a growth element as well. Think of the data centre space in REITs, poised to take advantage of growth in AI. Grocery-anchored shopping centres -- very defensive, but operating at record occupancy levels and record rental rate levels.

The REIT sector is made up of 16 different asset classes. Lots to choose from.

Rates are an important determinant for the path of real estate. That said, whether rates go up or down doesn't typically move real estate. It's rapid moves that affect it. The focus is much more on rents, and rents are predicated on supply/demand fundamentals.

Believes rates will be relatively stable, within a band of 50 bps, over the next year.

Stocks hitting another record high today is one thing. But this week we get a huge percentage of S&P 500 market cap reporting, including 4 of the big 7 tech names. 

For him, it's all about what they say on capital expenditures regarding AI. Recent weeks have seen a massive runup in semiconductors. The market is, he believes, overly enthusiastic about peace in the Middle East. 

Central banks have meetings, and this will be Powell's last for the Fed. We're also getting a mid-year, financial update in Canada. The Carney government has a plan to attract international interest and investment in Canada.

Lots of things are moving markets right now, and all of them are important. But earnings matter the most.

When ORCL announced its plans, market was alarmed because it was unexpected. First, the market said "Yay", but then questioned how it was going to be financed. 

So the capex spend doesn't matter for the big names throwing off bags of cash and with deep balance sheets. We need to build. The AI agents provide incredible productivity.

While he's a supporter and advocate of Israel, he hates to say it but his lens on the world is that this is Israel's 9/11 moment. It's an opportunity to take out a state sponsor of terror. If not now, then when?

That's the unofficial agenda. Everything else is just posturing.

Last week's educational segment covered what the futures markets are telling us. Short term for this year -- if oil starts trading below $70 then we're past the worst. If we start getting above $80, then we really need to worry. Since the initial attack on Iran the oil price has bounced around, meaning that the market's unclear which way this is going.

Semiconductor Rally

Semiconductors have been ripping last couple of weeks. Relative to the S&P, they've been a head-and-shoulders multiplier above it. The tendency is for the market to get excited about something, huge money runs in for a while, and then it goes sideways for quite a while.

Looking at a chart for SOX, it doubled in a relatively short period of time. Each rally was more intense on magnitude, but less in terms of time. That's matters behaviourally for markets, from the perspective of semis being the leader.

What's coming from hyperscalers this week, all the way through to NVDA's results a month from now, will matter for a continuation of this rally. We could, potentially, get a peak in markets.

The traders out there can try to play it. But we're very close to a peak trading top, and we could consolidate sideways for the next 6-12 months.

A lot of good news has been priced in. We need to get even better news than the expectations already built in.