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

We could be in a recession now. The consumer is weakening and gas demand is at a 25-year low. Renewable energy had gotten a lift from the IRA, but is imploding now. 

He expects earnings this month to be strong. Over the last 40 years, the S&P is up 4.6% in Q4, and 81% of the time the S&P is up.

What is Keynesian Economics and When Did it Become Popularized?

When we think of the current economic structure and principles that we use today, most of them are using Keynesian economics. Prior to 1946, Classical economic theory dominated the principles followed by market participants, and it wasn’t until the Great Depression in 1929 that political leaders sought out new theories to assist the economy's recovery.

Classical theory was rooted in the idea of supply, and more specifically that following a recession the economy would balance itself out, as businesses would continue to create goods and those goods would be bought by individuals. When the Great Depression hit in 1929, it lasted for 10 years, and it was devastating to the US stock market, GDP, and employment. Demand for goods was so low that economists were unsure of how to rebuild the economy since traditional theories relied on demand being readily available to soak up excess supply. John Maynard Keynes developed the Keynesian economic model, which was rooted in the idea of aggregate demand. Keynes proposed that in times of economic recession, the government should begin spending money on infrastructure, tax cuts, and other forms of spending to force demand in the economy and restore a balance between supply and demand. This is what brought the world out of the Great Depression in roughly 1939 – the government began increasing expenditures and introducing programs that would bring back full employment.
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Despite today's sharp sell-off, he feels that Q4 will be positive. Happening now is some tax-loss selling. Also, now there's a short-term fixed-income opportunity of 5-6% in GICs and bond ETFs, but there's little reward in holding these for the long term of 5-more years and stocks eventually rebound--and he expects. Remember that stocks can raise their dividends and bonds cannot. October could be bumpy but Q4 will be strong. The next move on interest rates will be down. It's immaterial if there's one more rate increase, likely in November and December, because rates will then hold. He likes energy, financials and industrials, where the selling is overdone and the fundamentals are very good. You can get a 6-7% divvy on a Canadian bank and he can't remember when that last happened. Banks will feel some turbulence over the mortgage market, but they can make more money under high interest rates than low.

Avoid office REITs, because people are not returning to the office, at least not yet. Industrial REITs are faring better and are worth a look. Housing REITs: the government is doing what they can to encourage building during this huge housing shortage, but ramping up will take time, especially when interest rates are high. Also, there's an attitude to place rent controls on properties, which is another obstacle. Be very cautious with REITs.

It's more about interest rates than a slowing economy. Medium/long-term, US interest rates are heading higher--higher for longer. So stocks that are sensitive to rates will remain vulnerable; fixed-income will not safe, though are supposed to be. He's focusing on companies that grow earnings and dividends. Growth is more important than the actual dividend level. He's overweight energy in Canada, and he likes private equity and insurance in America. Long-term, Canadian banks always end up on top.

Relatively strong job growth will make it hard for US Federal Reserve to tame inflation. Until pain on Main St. is felt - inflation will continue. Recent Jerome Powell comments this week have revealed nothing new. Believes bi-partisan nature of US Government will result in slow decisions on economy.

Looking ahead to earnings as investors approach year end. Believes equity markets not priced for "higher for longer" interest rates. Expecting tough period ahead for investors. Expecting interest rates to increase a little bit more. Main St. needs to feel economic pain before inflation will fall. 

Learning From Professionals:

One great tool for idea generation when investing is looking at what others are doing in their portfolios. The stocks and the size at which they hold them can be an interesting signal into what an investor might be seeing at a company. Of course, this information is not always easy to find and this is where we come in. Just because a manager holds a stock does not mean it will work out or is appropriate for everyone. It does, however, offer a stamp of approval from someone that already owns the shares and at worst provides some ideas for an investor. One example is  Berkshire Hathaway (BRK), which is led by Warren Buffett and Charlie Munger. BRK is associated with many blue-chip stocks. BRK holds 48 positions at the time of analysis.
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In October, she expects earnings to be strong and to turn the market around. It would be the first quarter of earnings growth after quarters of weakening earnings. Energy should have a much better quarter, due to rising oil prices. September has brought the market back to reality after the June/July rally. Though, the economy remains strong, despite the Fed likely staying higher for longer. At the core are earnings next month. Megatech: One way they benefit is that their huge cash flows earn on high interest rates by doing nothing, and they could make acquisitions to grow. Also, their PEs are reasonable.

The Chinese consumer saved more than Americans during Covid, saved a lot, so there's a lot of cash sitting on the sidelines. Also, China has been exporting deflationary goods (cheaper) which benefits American consumers, because of the weaker Chinese economy. But a risk for the global consumer are high and higher oil prices which would inflate prices.

It's all about earnings as we head into October, and he expects them to be strong, reflecting a resilient consumer, though these earnings may deteriorate heading into 2024. That said, Q4 will be a positive one, with megatech leading, not healthcare, financials, energy or industrials.

Interest rates and stock can both rise, though to a certain point. Doesn't think the market will do well in Q4, given the market PE of 19x given where rates are. He's cautious, not bearish. For 15 years, the market has enjoyed free money, but many investors have never seen high rates without free money, so they need to adjust. Also, he loves megatech which could lead, though maybe only slightly or be flat.

Prediction of higher oil prices coming to fruition.
Expecting $85-$100 oil prices going forward. 
Record oil demand continuing to rise with shortfall in oil supply.
USA oil supply reducing (less productive wells) combined with Saudi production cuts. 
Fear of recession also not materializing. 
Global oil inventories at all time lows. 

Market Sectors & 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.
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