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

You're starting to see commentary out of the Fed, not necessarily that they're going to hike once more, but that rates are going to stay higher for longer. The forecast is for a 1/4 rate reduction by this time next year. Adjustments will have to be made, both personally and within portfolios.

That's right. Before rates started going up, they were called "zombie companies", where they were being kept alive by low interest rates. We're starting to see those companies fracture. In the Russell 3000, the top 20% of companies with high interest-coverage ratios were doing markedly better than the bottom 20%. Refinancing is coming in, and companies are getting less money with higher rates and the debt's coming back to roost.

Companies with either low debt levels and positive cash positions, or debt levels that are serviced with internally generated cash, are the ones that will do better over time. The stronger will do better, and the longer rates stay high, the more that trend will continue.

There's a lot happening geopolitically (Russia, Ukraine, Israel, Hamas), and Washington was gridlocked as it looked for a House speaker, but fortunately Canada was not effected. Canada is stable politically and economically as inflation is declining as are interest rates. TSX is trading at 13x PE vs. 19x in the US. The TSX pays a 3.5% dividend yield vs. 1.5% on the S&P. There's pressure on yield stocks here (telcos, banks, utilities) as investors have shifted out of them, but he sees defence in energy stocks which pay large dividends and are supported by high oil prices. Invest in companies with recurring revenues, profits and healthy balance sheets.

Ghastly Growth: Canadian GDP Lingers Below the Average:

Canadian GDP spiked in 2021 to 2022 following a sharp move lower in 2020, however, it has since begun sliding lower throughout 2023. Canada’s year-over-year GDP growth is now at a meager 1.12%, lower than its long-term average of 2.61% dating back to 1970. Rising interest rates have been putting pressure on businesses and individuals across the country, and interest-rate sensitive industries such as housing, manufacturing, and financial services have been seeing the impacts of a worsening global macro environment. 
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For the moment, the Fed is leaving interest rates alone and sound less eager to tighten. This gives investors the confidence to buy stocks of companies that just great numbers.

Historically, we're starting a bullish six-month period where stocks tends to rise. The last 6 months this year and in 2022 were weak. Why? Historically, people de-risk in the summer, but come back in the winter; analysts start the year positively, then rewrite their outlooks and downgrade so they can meet their end-of-the-year (were too optimistic, then adjusted). A worry is the $2-trillion deficit in the US as America keeps spending. We haven't seen a true slowdown here or there, but governments cannot keep spending like this.

Seasonally strong from February into May, then July to early October, which happened this year. But seasonally weak now. He's bullish oil. Wait on oil till December.

When the VIX falls below 15, the market is less volatile, and very volatile at 40. Today at 19, it's average. Be careful using the VIX to predict returns, not recommended. The VIX around 9 is vulnerable to complacency, and at 40 the market could be bottoming.

War & geopolitical conflicts making headlines, but real concern for investors is interest rates. Believes investors are starting to believe US Fed will keep rates higher for longer. Stronger economy & high US Fed spending will also ensure rates are buoyant. 40 year downward trend in rates is starting to reverse. 

Eerie Stagnation: Major Indices Trapped in a 2.5-Year Time Warp:

The major financial indices, the S&P 500, the Nasdaq composite, and the TSX, have all been mostly flat since mid-2021. This eerie stagnation has occurred through a series of melt-ups, meltdowns, and lots of choppy sideways action. The past 2.5 years have been plagued by high and rising inflation, elevated interest rates, and bursts of economic shocks, leading to a stagnant stock market. 
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The market is oversold. What does it need to breakout? 1) New bond buyers and no more foreign selling. 2) The Fed stops selling its bond hoard. 3) Data showing growth without inflation. 4) Ending giant forecast cuts. 5) Stop dumping the stock of well-run companies in a temporary rut, like Danaher 6) Accepting a potential forecast cut by Apple. 7) No more price target cuts. 8) End of rate-cut predictions. 9) Wage cuts or no increases, which are impacting the car industry for example. 10) Wars contained, namely Israel/Hamas.

Global oil inventories at lowest levels since 2017. Oil demand remains strong as recession fears have not come to fruition. Believes OPEC will remain disciplined to bring on new production. Expecting Saudi Arabia ~1M bbl cut to remain through end of Q1 2024. Energy stocks do not require anything higher than $80 WTI. Discount on energy stocks remains very high. Final debt targets are being met across the industry. Large stock buybacks and dividend increases on the horizon for energy investors. Balance sheets and free cash flows are the best in the history of the industry. 

Canadian Bond Prices Haunted by Soaring Yields

Bond prices are inversely correlated with interest rates, and thus, as interest rates rise, bond prices fall. Investors have traditionally liked bonds for their low correlation with the equities market, but over the past three years, this low correlation has led to a 35% decline for the iShares Core Canadian Long-Term Bond ETF (XLB). This decline comes amid a meteoric rise in the Canadian 10-year bond yield from 0.6% to 4.1%. 
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Chilling Drop: Canadian Utility Stocks' Plummet

It has been a bloody and brutal few months for Canadian utility stocks, as investors worry of the ramifications from a ‘higher-for-longer’ theme. Utility stocks were particularly bruised as these names are well-known to carry significantly high debt loads. It was not only the high debt burdens that utility names hold, but also the weakening prospects of the yield provided by utility companies versus a relatively risk-free GIC or high-interest savings ETF which are yielding more than 5%. The iShares S&P/TSX Capped Utilities ETF (XUT) posted a 16% rolling-three month decline, matching some of its worst drawdowns from the past. 
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