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

Absolutely. The economy's been pretty resilient in the face of these higher interest rates. For the first time ever, he listened to J. Powell's conference call yesterday. Despite the headlines that they're not going to cut rates anytime in the next few months, Powell acknowledged that the first rate cut decision will be huge for the markets.

If data stays where it is, we can expect to see rate cuts in the back half of this year almost certainly. So the market's pricing some of that in. If we do get some rate cuts, it's going to give some relief to consumers who are sitting in a lot of debt. Wages are still rising. He thinks the economy will probably escape a recession.

Lots of bargains in lots of places. 2024 has started off like 2023, where the tech stocks are driving markets. Outside of that, everything else is treading water. Some of the world's great businesses, both in the US and abroad, are trading at really attractive valuations and offer lots of value because they haven't moved very much in a couple of years.

He's completely wrong. US retains its high credit rating because its tax rate is one of the lowest in the world. If the US ever runs into serious issues, it can raise taxes somewhat. Reality is that the US economy continues to grow, and debt as a percentage of GDP is declining. So he doesn't see any issue there, but it makes for great headlines.

Inflation has already had an impact on debt. The US would have to pass larger spending bills, and that's just about impossible with the Congress they have. There are so many things going on in the background that are out of government control. They spent a ton of money just like everyone else during Covid. Debt to GDP in most countries is on the decline.

Strongly advises investors to avoid rate-reset preferreds. Reason: traded horribly when rates went down, and horribly when rates went up. Relatively illiquid. Not fixed income, not equities. Either buy fixed income, where you know what your return will be and the maturity date. Or buy equities and get the growth.

Whole rate reset world has not been great for investors for a number of years. He thinks the whole sector will have less issuance over time.

GOOG had some difficult numbers but, generally, the numbers seem to be good. We're waiting for Thursday, when META and a bunch of other names will come out. MSFT's numbers show that they were executing quite well over the quarter. 

The big thing is how do companies show how the talk about AI will drive revenue? That's difficult. It is slowly happening, as can be seen by MSFT's numbers. It will take time to implement AI into products and then benefit from that.

The other issue is that expectations have gotten very high for a lot of companies. Even though they're beating them, stocks are pulling back.

There's a target of 2% that we're supposed to get to. If you drop rates too quickly, you may get stuck in a situation where inflation stays higher and you may have to hike again, and central banks don't want to do that. People criticized them for not jumping to hike rates sooner, but the reason they didn't was they felt that US and Canadian economies were fragile.

Central banks can push down inflation faster later on if they need to, rather than starting to lower rates now. Market's pushing for 6 rates cuts, but waiting is better for the stock and bond markets and for the economy. If central banks around the world wait, we'll have a better economy down the road.

Canadian banks have underperformed for 2 years in a row, which is very strange. Last quarter, all the banks "kitchen sinked" everything, giving expectations that things were not going to be pleasant. But they're actually setting up to beat expectations over the next year.

Cost structure's a bit out of whack, and they all need to cut back. Very hard for a bank in Canada to lay off people, so it takes a long time to take down their labour force.

He doesn't own gold stocks. Gold exploration is expensive, so it's easier to take over a company. Environmentally unfriendly, often in bad parts of the world.

With the price of gold where it is, why aren't the stocks higher? Companies may have aspects to them that don't benefit them even when the price of gold goes up. You might be better off owning a mid-cap stock that's not as leveraged to gold. There's an argument to be made that, if you really believe in gold, you should just own a gold ETF.

He doesn't own any EM stocks or ETFs. You can still get a lot of diversification owning NA stocks. For example, 50% of MSFT revenue comes from international. You can be over-diversified, and you already get a lot of diversification from these big global companies.

If you are in EMs, do it through an ETF. You have to have a very long timeline for this. The companies tend to be smaller and much more volatile.

He does own international stocks, but they're a very small percentage of his portfolio.

Market Update:

The TSX index was up 3.5% for the month of December 2023, up 8.68% for the year 2023. This compares to the performance of the S&P 500 which was up 24.2% for the year; DJ Industrials up 13.7% and the Nasdaq  Index up 43.4%. Globally, 2023 was a strong year as hopes for interest rates to turn down in 2024 led to general price earnings ratio expansion as the year ran out. However, inflation rose to 3.4%Y/Y for December 2022 in Canada and the US inflation rate also ticked up to 3.2%. On the employment front, full time employment was sinking in the US and Canada. The high immigration rate in Canada softened the employment drop in Canada. That fact will also soften a drop in home prices, but support rising rental rates. Rate cuts are still expected in 2024, but perhaps at a slower rate than previously anticipated. With this background the following Table presents the high and low stock market performers in Canada in December 2023.
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He wasn't surprised with Powell nor the sell-off. People fool themselves into unjustified euphoria. Yes, in 2024, stocks can indeed go down. The risk is for the Fed to cut too quickly and then we get a hot inflation number. Instead, Powell is doing the right thing.

Last year, markets did very well because of tech, but the rest of the sectors were very mixed. A mixed year. 2024, we'll likely see the opposite, because the economy is weak. So, tech will not perform as strongly. Some names are left behind, so this is a great stockpicker's market. Profits will come under pressure this year.

Watching for US Treasury announcements this week on quarterly refinancing needs. Appears requirements will be less than originally planned for. Upcoming US Fed meeting will also be indicative of US economy. If US Fed starts to issue more bonds than expected, not a good sign for markets (need to raise capital is bad). Widely expected that US Fed will keep rates flat, and appears rate cuts are on the horizon. Reduction of US Fed balance sheet will also be interesting to watch. Upcoming earnings from big tech companies will be defining on direction of markets (could break momentum of markets). 

Educational Segment.

Best place to get growth in portfolio that is not tech oriented is ETF called PAVE. Offers investors an option to get infrastructure spending exposure. As globalization reduces, more spending will occur "at home" in North America. Bricks & mortar staple businesses also provide traditional cash flows. Not a cheap valuation, but would recommend buying on share price weakness. PAVE ETF also pays a nice dividend yield for defensive investors.