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

The question was on REIT's. He stays away from the sector which is still potentially over-valued even though prices have come down. Look at vacancy rates, especially with office space REIT's, as well as debt. The only one he owns is Flagship Communities  (MCH.U) which is a micro-cap.

Markets are digesting this. All year, stocks have said no recession, soft landing, rates will be cut next year, while bonds have signalled recession. Stocks are right; we're seeing the un-inversion of the bond market.

What's next is earnings season, and expectations are higher over last year. There's a chance that earnings will fall short of expectations. He's been cautious in recent weeks and has been trimming exposure. He's amazed that some on Wall St. expect a soft landing and the the Fed will cut rates. They won't, and sees a recession coming, because inflation isn't under control: oil costs more, UPS and the UAW are on strike and the IRA hasn't deployed capital yet. Car leasing has soared 20-40%. Consumers will be making hard choices. The market will go lower, not higher.

How do you stay invested in this period of digestion where there's a lot of risk. There remains inflation pressure on consumers that will impact spending. Stick with companies that have healthy free cash float, moats, competitive advantage and most importantly, valuation. We're in the middle of a correction that is testing moving averages. What can earnings and valuations do? The Fed will be higher for longer.

Consumer staples have badly lagged this year, but are clearly a defensive play. Food and energy inflation have shrunk consumer discretionary spending. Not surprised to see household retailers trade. The challenge for staples in recent years is their lean margins, but she expects a shift given disinflation.

Investors should not expect lower interest rates going forward - current rates are historically average. 
Believes market is oversold at current prices - expecting rally before year end.
Investors have exited the choppy period of the year.
Select few tech names inflating the markets (NVIDIA, Alphabet etc.)
US Federal Reserve interest rate policy appears to be successfully avoiding a recession.

US banks positioned favorably going forward.
Increased interest rates will benefit profits.
Capital markets business - starting to show some green shoots.
Owns several US large cap banks (JP Morgran, Bank of America, Morgan Stanley).

Take a long-term view.

In the short term, the market is a voting machine. In the long term, it is a weighing machine. Short-term stock prices are influenced by a multitude of factors: interest rates, inflation, sentiment, politics, analyst upgrades and so on. But in the longer term, it is how a company specifically performs that will determine its true value. Nothing else really matters if one is looking at an investment period of 10 years or more (and you should).

Academic studies have proven that over one day or week, the odds of having a positive investment return are worse than 50/50. Over a one-year period, this rises to 73 per cent. Over three years, 84 per cent. Over five years, 88 per cent. Over 10 years, 94 per cent. Over 20 years, it’s pretty close to 100 per cent.

As they say, it’s not timing the market, it’s time in the market. But most investors do themselves a disservice by not sticking it out long enough. We get customers saying, “I’ve owned this stock for three months and it is not performing. What should I do?” Sometimes, stocks take a while to perform. Patience is certainly required at times in the market.
Unlock Premium - Try 5i Free

We know the economy's slowing. In Canada, Q2 GDP was down 0.2%. The US came in much better at 2.1%. The consumer's held up relatively well, especially the US consumer. They were drawing on savings that were built up during the pandemic. Most of those savings are gone now. The savings rate is actually back down below, yet credit card debt is higher than, pre-pandemic levels. Also, lines of credit are going back up. Delinquencies have been slowly going up, though not yet at the level that spells trouble.

What all this tells her is that going forward, household spending will rely much more on employment and interest rates. From yesterday, Fed Chair Powell implied that rates will stay higher for longer, and the market's reacting to that.

But the positive side is Powell suggesting that a soft landing is still possible, given that the economy's holding up much better.

Eventually the economy will slow to the point where central banks have to start cutting. Consensus expectations are that that point will be well into next year. In Canada, the ratio of debt to disposable income is much higher than it is in the States, so our economy is much more sensitive to higher interest rates. 

Canada has variable rate mortgages, but they aren't really sold in the US where fixed rate is the norm. As rates stay higher for longer, and those mortgages need to reset, that's going to impact households. Unfortunately, CPI in Canada is trending the wrong way, so the BOC has a dilemma as to what to do on the next rate decision.

Higher rates have been a huge headwind for income stocks, and many have underperformed. The choice depends on your risk tolerance and your time horizon. You can get a 3-year GIC for 5-5.5%, 3-year corporate bonds are yielding 5.5%. If your timeframe is below 5 years, and you want to be defensive and conservative and not lose any capital, maybe the fixed income route is the thing to do.

Longer term, say over 5 years, if you can withstand some volatility, there are a lot of income stocks that look quite attractive because of the pullback. It's a good time to build positions, because interest rates aren't always going to be at these levels. You don't need to pick stocks with the absolute highest yield, but pick ones with an attractive yield, plus you'll get some capital appreciation over time. Your total return will be in excess of what you can get in the fixed income market right now.

See her Top Picks.

She's looking at the sector, but hasn't found the right investment vehicle. When an area becomes topical, valuations get ahead of themselves. Has a lot of potential, especially with EVs.

Pretty much like August and part of July, sort of range bound. The S&P and the NASDAQ have been either side of the 50-day MA, kept in that band of 1-2% above and below. Hopefully, today we get a breakout, though he can't predict which way it will go.

The recipe and ingredients are there for a breakout, either higher or lower. It will all come down to the press conference after the Fed rate decision. If J. Powell is more hawkish, markets will probably test on the downside. If he's not, we might get a bit of a rally. The market just has to break out of the range it's been in for the last 7-8 weeks.

Not at all. A year ago, he was talking about generative AI that could be the next catalyst to come in the technology arena. And that's what happened. 

The sector has matured, because you know who the players are. You have the hyperscalers with the cloud, and you have the processing names like NVDA and AMD and INTC coming in. In 2024, new chips will be coming out from those names and they'll be quite competitive. And then you have the software stack. It's all coming together, but you can see who's in the leadership position.

With interest rates high, and potentially going higher, you really have to stick with the big names that have the deep pockets.