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

Fabulous 9-week rally to end 2023, but we're stumbling out of the gate so far in 2024. We were overbought quite a bit, so some consolidation should not be surprising. Strong US labour data, some uptick in bond yields, and today's inflation print was hotter than expected. Markets are taking that in stride.

Renewed concerns about the trajectory of interest rates and inflation as well. Data since the 1950s shows that Q1 of an election year is typically flattish. So he expects some bumpiness in Q1. Fun fact: since 1950, in 11 observations of a first-term election-year president we've never had a negative return for the calendar year for the S&P 500. In fact, the average return is 12.2%.

Yes. The MSCI World Index is at 73%. Last 3 months has seen the dominance of tech stocks fading a bit, and we're getting broader participation from other sectors such as healthcare, industrials, and financials. That's great for investors who are diversified, because last year it was pretty much all about tech and communications.

Done well, now trading about 200-day MA. On an uptrend, with ascending higher highs and higher lows. Likes the space. Important to have international exposure given the valuation discount relative to the US.

Covered call makes sense if you need the income. 

He'd argue that you'll get a better total return, over time, owning the underlying shares or an ETF of US banks instead of using the covered call strategy. One reason is because many shares get struck out as they move up. Also expense ratios tend to be higher than just owning the underlying basket of securities.

The rate adjustment, from 3.65% in the spring of 2023 to 5% in early October, was a landmark moment in terms of valuations having to adjust to the new normal of higher rates. Rates moved up at the front end, but not at the long end.

We're through that now. Long rates are certainly not going back to the levels of 2020-21, but not even to the levels of the last decade. We're in a new range of 3-5% on the 10-year. These utility and infrastructure companies have more robust business opportunities ahead of them for the next decade, which should offset some of the rate impact.

The actual business impact of higher rates is not as great as the market assigned to it.

That's a short-term move that could reverse itself in 2024. The worry there was not so much rate driven, though rates are a big part of banking. The worry there was on the economy. He's in the camp of there being a harder landing than most are expecting, if rates stay where they are. 

You don't have rate cuts without getting a hard landing. And you can't have a good economy with rates this high. We're between a rock and a hard place.

He has a weighting in 4 of the 5 big banks, but he's quite a bit underweight on financials and on banks specifically.

We're seeing some layoffs, contraction below and at the surface. If he's right on the economy, 2024 might be the year we see it above the surface. The economy last year was stronger than most thought, including himself. We'll see if we can do it two years in a row.

When you're getting paid to wait by sitting in cash, you can afford to wait for many of the companies on your radar.

He likes stocks that just trend steadily upwards over a long period of time. It gives a better psychological balance for his clients to stay invested and continue to fund their lifestyle.

The businesses he chooses aren't that exciting, so it's hard to ramp them up too much. But by the same token, you can't take them down. No stock is completely immune, but he tries to make choices where it happens less.

There are certain stocks that the market will love and leave. It's not a commentary on management, but on how the stock market deals with certain businesses. Retail and tech can act the same way. Volatility is embedded just based on how large pools of capital treat certain investments.

LNG Canada shores up the floor for pricing, so it should finally make it more rational for producers than to go on those crazy cycles. But the other side is that gas is a very robust commodity once you turn on the taps. Coastal GasLink won't be accepting gas until the back half of this year, and LNG Canada will take time to be at full capacity.

We're getting close, and we'll have to see how the producers respond. He's very positive long term. But short-medium term, anything can happen. He remains diversified. He prefers a company like CNQ to make the decisions and pull the levers, than going with a company that lives and dies by the gas price.

The other thing is that LNG to get to Asia via the Panama Canal is severely hampered right now. Creates even more of an opportunity for LNG Canada.

All the banks have them, but different classes. So a fund manager can buy an F class, which has no fee and pays 4.8%. Discount brokerages offer A class, which takes a fee. It's bank interest, not commercial paper or money market, so it's the safest.

Look up the codes online with "high interest savings account". If you have trouble, call your provider to find out which one you're able to buy. 

These differ from traditional money market funds in that they're a vehicle to collect bank deposits. It's not a security, it's just a bank deposit, same as a savings account.

The Over-Diversification of ETFs:

The justification for owning fewer ETFs is also that most ETFs hold hundreds of individual stocks within them, already creating a lot of asset and sector diversification. Another important factor for investors to consider is any potential overlap between ETFs. For example, in this Reddit post, VFV, VOO, and XSP all have the same holdings and are designed to track the same index, the S&P 500. Thus, it is over-diversification for many investors to hold more than one of these types of ETFs.
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China has significant economic problems--real estate, shadow banking and weak demographics--and no longer makes it an attractive place to invest. Inflation will hold up higher than people expect, and this will impact interest-sensitive stocks as well as bonds. There are are also geopolitical concerns in the Ukraine and Middle East, which will benefit only a few industries. Massive defence spending will leave little for everything else. He expects 2024 to be very choppy and we've seen this so far this year. We were living in la-la land with lower interest rates, but now we will see normalization with higher rates for longer.

Will the central banks engineer a soft landing without a recession? That's the big question. In 2023, market breadth was narrow with Shopify comprised a third of the TYSX returns, and tech was up 70% that year (only 10 stocks on the TSX). Dividend stocks struggled. But inflation moderated from 8.1% in June 2022 to 3.1% last November. (Next print is on Jan. 18, 2024.) Supply chain shortages faded. GDP was flat. In 2024, the central bank will probably do quant easing next year with 5 rate cuts from 5% to 3.75%, possibly. He expects ever-widening market breadth. Three scenarios: 1) the Bank of Canada makes a policy mistake by leaving rates too high too long which triggers a recession and reduces GDP, 2) there's a soft landing and no recession after rate cuts strengthens the economy and inflation remains contained, which widens the rally more; or 3) inflation picks up higher than 3.1% which leaves the central bank keeping rates higher for longer. Stay balanced, diversified and defensive.

Perpetuals offer fixed rates, like 6% perpetually. A reset has a basis point feature, like an initial coupon of 6%, then a spread of 200 basis points (always benchmarked to the 5-year government bond). Every 5 years, the latter will reset to 200 BPs above this bond. So, if you believe interest rates are going down, buy the perpetual. If you believe rates rise, get the reset. He expects rates to decline.