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

Bottom line is that they have the numbers they use to calculate inflation, and that's how they set interest rates. He expects inflation to continue to come down in Canada, and expects to see significant deflation in a lot of sectors. So, hopefully, those 3 for $11 chips will come back down to 3 for $10.

The market will be volatile between now and earnings in a few weeks. Use that volatility, because the economy will stay strong. The Fed doesn't need to do anything.

Labour numbers were good today. We don't need to cut rates this year; the economy is strong.

Market Update:

The Bank of Canada cuts key interest rates for the first time in more than four years with a quarter-percentage-point cut to 4.75 percent, marking a major turning point in the fight against inflation. In addition, the European Central Bank (ECB) cuts interest rates by 25 basis points to 3.75%, joining other countries to unwind the steepest rate hikes used to tamper post-pandemic inflation. The Canadian dollar was 73.16 cents USD. The U.S. S&P500 ended the week up 2.1%, while the TSX was up 0.4%.

A lot more greens this week than reds. Consumer discretionary edged up 3.0%. Consumer staples, industrial and real estate gained 2.5%, each. Technology gained 1.8%, while financials ended the week flat. Energy and materials edged down by 4% and 1.2%, respectively. The most heavily traded shares by volume were Nevada Copper, Bitfarms, and Cenovus Energy.
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The word of the last several months has been resilience. Still elevated inflation and relatively higher interest rates, yet global markets are still up 11% YTD. Technology and the S&P 500 have done even better than that.

We have to talk about the strength of the US economy. The consumer continues to be very strong, and corporate earnings continue to be very solid. Unemployment rate is near decade lows. He's very optimistic about the rest of the year. Based on the magnitude and length of this bull market, 20 months or so, we're probably in the 4th-6th inning at this point. 

We're probably going to see 1-2 cuts by the Fed by the end of the year, depending on inflation numbers. Going back a month, predictions were for no rate cuts; now we're looking at potentially 2 cuts based on futures markets. Have to remember that there's still a lot of money sitting in money market assets, about $6T USD.

Once rates start coming down, investors might be encouraged to move money into better-performing areas such as risk assets like equities. 

Pullbacks and corrections are par for the course. It's the price of admission to the stock market. Looking back to 1950 for the S&P 500, there are three 5% pullbacks on average in any given year, and one 10% correction. Look for those to add to good-quality holdings. Always pay attention to total asset mix and allocation in your portfolio.

It's almost a given that choppiness will come, and you want to take advantage of those times.

Not all-in on AI. Go back to 2000, when we knew that the internet would be a big part of the future. But lo and behold, not every internet company survived. Tech market was down 82-83% for 2.5 years. AI is a very important part of our future and of investing today, but be cautious about buying everything in that space and only in that space.

His tilt is still secular, long-term growth companies. Very little competition, duopolies or oligopolies, such as COST or ASML. Really command the market and have pricing power, such as MA or Visa.

Yes. Companies will go through quarters where they'll hold off and not spend on something for now. But when it comes to cybersecurity, it's not something they can hold off on spending for years or even several quarters.

We've all been wondering when it was going to happen, and now it has. The positive is that it's great for stocks. The negative is that it's a reflection that the economy is slowing, and Canada has economic issues right now. As an investor, you want to capture the benefits of lower interest rates but still be cautious of areas where there's weakness in the economy. 

Great for both growth and rate-sensitive stocks. Lower rates are also good for the economic cycle. There's the AI revolution, and some of the best growth rates and most attractive valuations are in Canadian AI stocks.

The best-performing markets globally in the last 5 years have been those with a fairly high concentration in technology. The Canadian market is 60% either financials or resources. There are these small chunks of attractive growth, and that's what he's looking for.

He can't be agnostic to the rate environment, because typically the small- and mid-caps are quite interest-rate sensitive. Interest rate environment that's flat or starting to roll over is one of the pre-conditions for the next upward small- to mid-cap market.

Consistent growth, margins, and reasonable valuations. He's not typically looking for pre-profitable companies. All his Past Top Picks are AI companies trading at 5x PE or less.

In a typical small- to mid-cap cycle, you get a 7-year run, and then a year or year and a half correction of multiple contraction. So a stock trading at 13-14x, which seems reasonable for a growth stock, suddenly finds itself trading at 5x. It's not that these companies are growing that fast, but it's the multiple expansion at work.

What you need is the psychology of the market to get to the point where it's going to look at these stocks. When you get a correction, money comes out of small caps, valuations fall, usually interest rates are still rising. So the money can only come back in one direction. Once interest rates start to roll over, people start looking for growth. 

Thinks we're in the first year of the next 6 or 7-year cycle. All his Top Picks are under 10x earnings.