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

Analyzing inflation numbers reported this week - rising numbers a concern. Unsure whether 1 month blip, or will resume cooling. Large industrial companies seeing costs come down which points towards lower inflation. Market all time highs not a concern, expects strength in economy to pass through to broader markets (not just tech stocks). Office real estate (Toronto) demand is still poor - work from home trend not going away. 

Market Update:

The US Consumer Price Index (CPI) in January came hotter than expected, rising 3.1% over the prior year, compared to economist forecast of 2.9% annual increase, indicating inflation remains sticky. In addition, the US wholesale costs, the Producer Price Index in January rose 0.3% compared to the consensus estimate of 0.1%, the largest gain in five months, signalling that the inflation fight may not be over yet. The Canadian dollar was 74.20 cents USD. The U.S. S&P500 ended the week up flat, while the TSX was up 1.4%.

All but one sector rose this week. Energy gained 4.4%, while consumer staples and financials added 2.2%, each. Industrials and materials added 2.0% and 1.5%, respectively. Real estate rose 1.2% and consumer discretionary edged up 1.1%. On the other hand, information technology ended the week down 2.7%. The most heavily traded shares by volume were  Air Canada, Bitfarms and Manulife Financial.
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Today's hotter than expected PPI and Tuesday's CPI numbers aren't reason to worry, because the U.S. has economic growth. Inflation is not the problem, and the disinflation trend continues.

Somewhat. We're starting to see industrials, financials, and old-guard consumer discretionary perform. Seeing more market participation, broadening of breadth generally speaking. When you look at the S&P 500 and the MSCI World Index, over 65% of each one's constituents are now above the 200-day MA. That's a good sign.

US election years tend to be decent, particularly if it's a first-term President. Going back to 1950, the average return of the S&P 500 for an election year of a first-term President is 12.2%. 

How goes January, so goes the rest of the year. Going back to 1950, 16.8% average, full-year return for the S&P 500 whenever January is positive.

First quarter of an election year tends to be more volatile. Stocks that have run up may hit an air pocket, and weakness is your chance to add.

Trending lower, even though the number this week was a little higher than hoped for. Interest rates are stabilizing, with debate on how many times US and Canadian central banks will cut rates. He sees multiple rate cuts this year.

Q4 GDP in the US was way above expectations at 3.3%. Labour markets are pretty solid, holding steady at 3.7% in the US.

More difficult to find once the markets have done well, as when the price goes up the yield goes down.

One of the screens he uses for low-beta stocks, with over 5% yield, is that the price is above the 200-day moving average and moving higher. He wants to see this good, long-term technical trend. The beta should be less than that of the market.

First, consider the expense ratios. Hedged versions tend to be more expensive. A non-hedged version in USD should be cheaper. He prefers non-hedged, unless maybe if the loonie were at 80 cents.

Thinks USD will remain firm, and loonie will be in a 70-80 cent environment. So you can determine when to hedge and when not, based on that.

On the face of it, the recent print seems a little disappointing. Market reaction yesterday was quite negative, as it pushes lower interest rates further down the road. But if you look at core inflation, it's come down from about 6% to 3%. 

If you look at the shorter-term inflation numbers, they're below the 2% threshold and trending down. Inflation is heading in the right direction, boding well for rate cuts down the road.

Yes, and that's a bigger concern than interest rates right now. Fed Reserve's total assets on its balance sheet have gone up by more than 10x over the last 14 years. Massive amount of liquidity that's been pushed into financial markets. 

Last time Fed started to tighten, they overdid it and were forced to reverse course pretty abruptly. They're likely quite mindful of this and will be more measured this time around.

Potential for lower interest rates combined with some moderation in QT is quite positive for the financial markets.

Huge dichotomy in terms of valuations between growth and income stocks. Hard to paint the market with one brush. Pockets of good value, but also parts that are quite rich. Be mindful. If you overpay for something, it could hurt your returns, plus it leaves you exposed if multiples were to contract.

The wonderful thing about compounders is their performance over a long time horizon, say 5-10 years. In Canada, we're lucky to have some phenomenal compounders. Examples include CSU, GIB.A, ATD, and BAM. 

For anyone investing, that's where you want to keep your attention. Don't just focus on 1-year performance. The power of compound investing is when you buy something that's really good, and you can't believe how much it's grown over 5-10-20 years later.

You lose out on this if you have too much of a value-only mindset and you're looking for things that are distressed. Look for great companies at a reasonable price. The trouble with a lot of compounders today is that a lot of them would be classified as growth stocks. There are, for instance, a good number of compounders in the tech space but the valuations are rich. 

If you look at companies that can grow, the valuations are very strong. And if you look at companies that don't have the growth, valuations are very weak. This is the time to know the compounders you want to buy, and just wait for things to fall to your price. There are some attractive income opportunities to invest in while you wait.

The two very best in Canada that he's ever come across are CSU and MEQ. MEQ is a smaller company, many similarities to CSU but doing it in a different space. For both, valuations are rich.

Even a small position in a diversified portfolio doesn't hurt or help, so it's kind of a waste of time. Don't go that route. If it's something you like, put it on your Buy list, and just watch and wait. Have it be a meaningful weight of 3-4%, learn about it over time, add on any weakness.