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

That's right. Belatedly for Canadians, we've seen the S&P/TSX Composite Index join its US equity index counterparts breaking out to fresh all-time highs in the last couple of weeks. He's increasingly encouraged with the durability of this ongoing cyclical bull market, in no small part due to the fact that it has broadened out.

In Q1, we saw 9 of the 11 economic sectors in Canada participate in the rise in the equity indices; 10/11 sectors in the US. Notable laggards are the interest-sensitives of utilities, telecoms, and real estate. 77% of all S&P 500 index members rose in Q1; 69% here in Canada. Historically, pretty strong breadth numbers. The foot soldiers are advancing alongside the generals (Mag 7). This increases confidence in the bull market.

Have to be mindful in the short to medium term that we've just had two back-to-back breathtaking performances by both Canadian and US stock markets. Markets don't move in a straight line. Reversals can be sharp, swift, sudden, and seem to come out of nowhere. One of the tells often is an extreme in sentiment.

He looks at the American Association of Individual Investors survey. Right now, 50% of US investors are bullish, and 22% are bearish. That's a lopsided sentiment. Not extreme, but fairly stretched. Signalling a yellow flag of caution. Could see a garden-variety correction of 5-10% in equity indices at any point.

Numbers in the US weren't as bad as the market's implying, but they were higher than expected. It was easy bringing inflation down from 8-9% to what it is today, since the supply bottlenecks from Covid have dissipated. 

But the big issue is that the last 1% is going to be difficult because it's due to housing, rent, and services. Much harder to bring down. Market predictions for rate cuts keep going down. Rates should probably stay where they are for some time.

Weird time for the Fed. They have meetings in June, July, September, and November 6-7. November is the US election, so no rate cuts that day. Very short timeframe in which to bring down rates. The 2% inflation target was chosen many years ago by central banks. That was the line in the sand, and they have to stick to it or it will diminish their credibility. 

One more thing. Historical average on rates is around 4%. Rates are not outrageously high; yes, on the short end, but they'll come down over time. Normalization of rates is important for people who are risk-averse, they can put money in GICs today at 5%. They went up the risk curve, into things they shouldn't have been in, and that hurt the average investor. Normalization is healthy for the economy in the long run.

A lot of companies have to raise prices, like the food industry, because they're just not making any money otherwise. There was a long period of time when they couldn't raise prices at all. Those companies may not be gouging, but that's where people feel it the most, so politics has to get involved.

Banks in the short term, as they're more interest-rate sensitive. Insurance companies have longer-term liabilities, on which they hedge exposure to interest rates. Lower rates help general asset markets, which insurance companies invest in. Going into financials in a declining interest rate environment is probably what you want to do.

CRTC wants to have more competition, but we're a small country with only 3-4 providers. US is 10x our size, and they have really only 3 big providers. So it's a weird request. As well, Canadian providers have to provide service to outlying areas that aren't necessarily cost effective.

There's possible downside risk in smallcaps. Growth looks better than value and will continue to lead the market. The Nasdaq will move sideways or even pull back in the next few weeks until earnings begins the week of April 22 which could boost the entire market

Pros of Investing in the US Stock Market:

1. Diverse Opportunities:

The US markets offer a wide range of sectors, including technology, healthcare, and consumer goods. The US is home to mega-cap tech giants that help drive innovation and have a global impact. The US healthcare sector is also of global importance, with large pharmaceutical, biotech, medical devices, and other companies.

2. Liquidity and Depth:

The US stock market is the largest in the world by market capitalization, and it encompasses a variety of of publicly traded companies across different sectors. Its high trading volumes ensure easy buying and selling of stocks. Investors appreciate this liquidity because it allows them to execute trades swiftly.

3. Innovation and Growth:

The US is a breeding ground for cutting-edge companies that drive technological advancements, disrupt industries, and redefine how we live and work. Silicon Valley hosts a cluster of tech giants, startups, and venture capital firms.
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Earnings will be crucial going forward. Markets have made such a big move since 2022, and if you missed 2023, sorry. He's surprised about the strength of 2024 so far. The US economy is strong, but Canada is starting to weaken. What will happen to the mortgage market when we head into 2026-7 as those mortgages come up for renewal. Nobody knows what will happen and something good or bad can derail a market. So, best to be a long-term investor. Ignore the macro and stay invested.

Believes CPI report in the USA will be indicative on health of economy. If inflation numbers are high - will make it difficult for US Fed to cut interest rates. Zero interest rate cuts will be a sign that the economy is not as strong as assumed by the broader market. 

Solar ETF's have positive future, but investors need to be selective. Many companies have not been able to earn consistent profits. Good news is that the demand for clean energy is rising. Overall, will be a positive, but investors need to be careful. Would recommend a wide variety of solar ETF's to balance risk on portfolio. On the other hand, oil demand not going away. Selection of traditional energy stocks would also help balance investor's portfolios. 

Cons of the Canadian Stock Market:

1. Limited Market Size:

The Canadian stock market is relatively smaller compared to its US counterpart. This smaller market size can reflect fewer investment options, the potential for sector concentration, and the lack of mega-cap companies. While Canada has some large corporations, it does not have the same level of mega-cap companies that the US market boasts. These mega-cap companies can often drive substantial market growth for innovation.

2. Sector Concentration:

The Canadian stock market has a significant concentration of financial institutions and energy companies. Just about half of the TSX index is comprised between just two sectors, energy and financials. This lack of diverse exposure to other sectors can be a drawback.
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Small caps are trading at a massive discount to large caps which gives investors an amazing opportunity in Canada and the U.S. Volumes are ticking up which means institutional investors are getting interested. Investors looking for growth have the best opportunities in small caps trading at low valuations. He is finding companies growing at 20, 30 and 40% per year but still trading at single digit P/E multiples. Small cap opportunities are in many sectors, not just tech and there is new leadership in the market. In Canada he considers a micro cap to be under $100 million, a small cap to be $100 million to $2 billion, and a mid cap to be $2 to 5 billion. Anything over $5 billion is a large cap. The U. S. is different - those numbers would be much higher since the markets are bigger.

The question was on picking sectors and then stocks, or picking the stocks first. Top down investors look at the macro environment to find the sectors and then look to individual stocks within those sectors. Bottom up investors look at specific opportunities (stocks) and choose ones that fit best based on their criteria. He is in this group. The great investors over time are mostly bottom up stock pickers. He hopes to own a company over a long period of time but watches for slowing growth and an expensive valuation. He looks for increases in his investments of 2 to 5 times. 

Believes stock markets are too high, and investors should be cautious. Alternative asset classes look attractive given recent highs in stock market. USA ETF products are performing very strongly, with Canada equivalents trailing. Innovation occurring at rapid rate in the ETF space. Bitcoin ETF products can be risky, but are offering investors opportunity.