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

Sector Impact on Investment Strategy:

Understanding sectors is not just about classification; it has a direct impact on investment strategies. Diversification, a cornerstone of smart investing, involves spreading investments across different sectors to minimize risk. By holding a mix of stocks from various sectors, investors can cushion their portfolios against a downturn affecting a single industry.

Moreover, sector analysis helps investors align their portfolio with market trends. For instance, if technology companies are thriving due to innovations, an investor might consider allocating more funds to the Information Technology sector.
Unlock Premium - Try 5i Free

Today's data shows an easing in the labour market. We are a far cry from a recessionary level. Core PC was up 4.2%. The Fed may be done raising rates, but they won't ease, because their inflation target remains 2%. She's encouraged that the rally has broadened out recently, like energy beating tech. This reflects earnings coming in better than expected. Earnings have troughed. You still want to own tech and comm services, but don't make it 35% of a portfolio. That's too risky.

The unemployment rate rose today, largely because participation increased. Good news in terms of the Fed's rate hikes, but you also don't want this trend to continue. The market is focusing on 2024 earnings. We are set up for a huge Q4 rally after September seasonality. He's position for the market to rip after that. When a market has rallied like this has this year, it crescendos positively in Q4--people chase performance, Many felt when this year started that there will be a recession, and that hasn't happened. He likes the market broadening, though tech won't collapsed. 

The rally will depend on earnings. Doesn't know what will happen in the rest of the year, but a recession in unlikely, more likely in 2024. Valuations are high. He expects a period of choppiness, but he is invested and not negative. He's been trimming tech modestly like Apple, because the PE rose. He loves energy and healthcare.

Recent GDP data lower than expected.
Believes higher interest rates are starting to take their toll on the economy.
Doesn't expect any major interest rate hikes going forward.
Optimistic about financial markets heading in Q4.
Non-tech sectors will start to catch up in valuations (healthcare, energy etc.)
Is a good time to be investing in dividend stocks(flat to lower interest rate environment). 

July Market Recap:

The TSE stock index was basically flat (+0.31%) over the monthly period ending August 2nd, 2023, and up 2.85% over the past year. The 2nd quarter GDP in Canada slowed to 1% while in the USA it grew 2.4%. Consumer spending in Canada was resilient, but still slowing in Canada. The IMF upgraded global GDP outlook to 3% (2.8% in April), but global economic risks remain tilted to the downside with disappointing Chinese economic recovery as one reason, as well as simmering geopolitical tensions. The June CPI was 2.8% in Canada and 3% in the US. The Federal Reserve and the BOC both raised their policy interest rates by 25 bps during July and suggested that more hikes may be necessary.
Unlock Premium - Try 5i Free

Really bifurcated market. Magnificent 7 have dominated index returns to the upside. A narrow collection of stocks have been rewarded in the market, yet there's a whole bunch that have been left behind. People are coming to grips with interest rates being up, there's a lag, debt-ridden companies are having some issues, and the economy is definitely slowing. 

Yes, that's a theme in the portfolio right now. Certain stable businesses can carry a bit more debt. He's calling for a higher for longer interest rate environment, and companies that carry a lot of debt are facing significantly higher interest rates when they go to refinance. Interest payments come right out of bottom line earnings, so that's going to be a drag for companies with a lot of debt.

Within the banks, there have been some outperformers and some underperformers. At the end of the day, all the banks are starting to show increasing loan losses. There's always a lag on the impact from higher interest rates, and the economy is now starting to see the effects.

Banks have big balance sheets with a lot of assets and a lot of debt. When things start to go wrong, it can cause some consternation among shareholders. They've broadly underperformed this year and may continue to struggle. Canadian banks are in a better position than a lot of US banks, but it's an area you want to keep your eye on.

He's definitely underweight.

Coming into 2020, it was the worst performing sector on the market. The scaremongering narrative of oil/gas coming to an end has been bought by a lot of uneducated investors. 

Money's gone away from the sector and a lot of people refuse to go back. This has provided an opportunity for the rest of the investing community that looks at stocks in a pragmatic way. You can pick up cheap assets with a good business that will make a lot of money over time.

Oil's hitting 6-month highs. There's a reason for that: a supply/demand imbalance. Oil will probably stay here or go higher over the coming year. This will probably encourage more activity.

Most of the stocks in the sector are undervalued and a buy. If you buy now and just sit and hold, you'll be rewarded from here.

Renewable power producers are, by and large, buys here. There's been huge hype. It's a growing area, but currently only a small part of the energy pie, around 10%. 

If you look at increasing the green power grid, you get to a certain point that if you're all wind and solar, you start having blackouts and brownouts because it's just not reliable enough. It will take a huge amount of investment to solve these issues by, for example, improving storage capacity. Politicians are being too idealistic on progress.

He categorizes nuclear power as reliable, green power. That's why Ontario has a good power grid, because 60% of our power comes from nuclear. It should be a growing area, but people have negative views on uranium and radioactive waste. Nuclear is one of the few options that makes sense, and people have to get comfortable with it.

He buys individual stocks, not funds, so he can't recommend a clean energy fund. See his Top Picks for a green energy name. When you choose your own stocks, make sure to do your homework and understand the fundamentals.

Otherwise, buying a TSX or S&P 500 broad index ETF is a good way to go. Dig in and look for the lowest management fees, some as low as .05%. He's seen ETFs with fees of almost 1%, getting close to what mutual funds charge, and that's not cheap.

It's been a good year. There's a lot of comment on how just a few stocks are doing a lot of the heavy lifting. It's starting to get better on breadth. 

There are still a lot of companies that have been left for dead over the last 12-18 months, especially sub-mega cap, or in the small-mid cap space. So there are a lot of interesting places to try to find value right now, but also some areas you need to be really careful with some of the valuations we're seeing.

That does happen. You do see the flows in and out of sectors and back into those that haven't been working. You need a lot of stuff to happen for that to work, so you can see why the big-caps are a crowded trade as people look for where to make money.

Meanwhile, things that are more sensitive to the economy and the data aren't performing as well. Canadian banks are a good example, lots of headwinds there. We're seeing the reality of what the underlying economy actually looks like versus what we hope will happen because of AI or a short-term move in travel demand.