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

This week he felt that small-caps, value and cyclicals are now a good place to be, though you don't need to get out of tech. Data this week showed that the economy is strong, including consumer demand, like airline flights. Also, interest rates will come down.

Believes seasonality for equity markets supports a strong July, followed by weakness through August and September. This is within the context of the “boring middle” of a new four-year cycle (three to five-year cyclical equity bull market). The Vanguard Total Stock Market ETF (VTI) historically supports positive seasonality through July before stalling in August and September. This implies that strength in July is an opportunity to position for weakness through the summer doldrums of the third quarter. We highlight uranium and homebuilders as two sectors at particular risk of a summer correction.

Our technical work suggests that equity markets are in phase two of the market cycle model, which we view as the boring middle as the underlying economy begins to show signs of strengthening and is typically marked by leadership in information technology, industrials, and basic materials. As a result, the bulk of our best ideas for 2024 are direct beneficiaries of this potential sector rotation. Our technical work indicates that the equity market correction that developed from late July – October 2023 marked a transition from phase one to phase two of the market cycle model.

Our longer-term cycle work supports a 2024 year-end target of 5,466 or another 14.6 per cent upside from the Dec. 29, 2023, close.

Market Update:

The US’s Consumer Price Index (CPI) falls for the first time since 2020 to an annualized rate of 3.0%, a deceleration from May’s 3.3% annual gain in prices. On the other hand, oil prices swung in a narrow range around $82 as demand for fuel consumption strengthened. The Canadian dollar was 73.40 cents USD. The U.S. S&P500 ended the week up 0.9%, while the TSX was up 0.8%.

All but one sector rose this week. Real estate and materials added 3.3% and 2.6%, respectively, while consumer discretionary and consumer staples added 1.8%, each. Financials rose 1.2%. Industrials and technology ended the week flat while energy gave up 2.1%. The most heavily traded shares by volume were Baytex Energy, Fission Uranium, and Toronto-Dominion Bank.
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The 3 words to describe the markets, particularly in the US, are stamina, tenacity and performance. Seeing great returns, really driven by the mega-cap stocks in the US with the S&P up about 18%. But when you take away the Magnificent 7, it's only about an 8-9% return so far this year.

NASDAQ's up 24%, a little less after today's move. The Dow's up only 5%, which speaks to the fact that the Dow doesn't have that much tech compared to the S&P 500.

Sees some substantial opportunities. At the same time it's complex, because there's some significant risk. Looking at the segments within technology, sees a lot of potential in cloud computing, AI and cybersecurity. But the high valuations are something to be careful of. 

When you look at the S&P 500 Info Technology Index, we're seeing 20-year highs in PE, price-to-cashflow, and price-to-sales ratios. Something you have to watch out for.

Generally speaking, sees global GDP growth being solid for the year. Advanced countries being a little bit stronger than developing countries. 

Inflation's moderating, as we saw today with the CPI number being a little less than expected. The first decline since May 2020, so that's good news and should lead to lower interest rates. Of course, we already saw the BOC and ECB cut rates last month. Should see some rate cutting in the US at some point this year.

If you have a 60% or 80% weighting in tech, that may not be the most appropriate weighting depending on your time horizon. Tech is expensive by a lot of degrees, so you want to look at other sectors whether financials, industrials, or healthcare. There are a lot of other growth stories out there, outside of tech.

From a taxation standpoint in a non-registered portfolio, it lets you defer capital gains via a return of capital. These types of strategies are quite efficient, as you're getting dividends as well as deferred capital gains instead of interest.

We look at technology and say, oh, tech is x% of the S&P 500. But then you have to add in the communications sector as well, which is mostly technology. Then you add in things like BRK, which people don't think of as technology, but half of it or more is AAPL. So the "true" weighting of tech in the S&P is actually closer to 40-45%.

For him, once a position gets to 5-7% (most likely 5.5-6%), he's going to rebalance downwards. Just to trim a bit and take a bit of risk off the table.

They should track pretty closely. The idea is that you get US stocks in Canadian dollars. Also beneficial for estate planning for very large, high net worth investors to avoid some US estate taxes.

He's not aware of one with just telecoms. You'd usually get the communications sector added in, with the likes of META, etc. But the ETF world is expanding by the minute every day, so you never know.

For both US and Canadian telcos, as interest rates moved higher, dividend yields looked less and less attractive to investors. So rising rates have hurt a lot of dividend-paying companies.

Not high growth, you won't see 15-20% EPS going forward.

Neutral on the sector. Long term, makes sense. But right now, much of the attention is on technology and high growth. The energy sector is neither of those things. Might start to perform well once the focus shifts.