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

It amazes him Wall Street's undying faith in the Chinese economy, of it being the best market in the world. And yet this is a country with 21% youth unemployment and this is a growth economy? China needs a better relationship with the U.S. 

US jobs report slightly below expectations - but still at a healthy number - which indicates strong economy.
Economy has continued to grow with strength across the board.
Expecting inflation to trend down.
Believes stock market will go higher in the second half of the year.
Corporate earnings less important than forward looking guidance. 
Believes A.I. will continue to be front-and-center within tech sector.

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Expects more volatility. We're jumping from data point to data point. Every time something's announced, the markets take that as an indicator of what's next to come. This morning we got ADP numbers from the US at 497K, with the estimate being 225K, wildly higher. This number measures the private sector estimate of job growth in the US.

These things create volatility, and that's what we're seeing in markets. The broad market TSX index is up 3-5% YTD, and the S&P's up 15%. These numbers don't really tell the whole story, as we have some really high flyers in both the TSX and the S&P. SHOP is up around 78% YTD, CSU is up in the 40% range. Then you have NVDA and TSLA in the US that are really driving a big part of those returns. Underneath that, you have a broad market that's really quite volatile.

We'll continue to see volatility until we get some clarity from the Fed and other central banks on interest rates. 

He ratcheted up his fixed income, and is staying short duration, but hasn't moved a lot in there. If the inflation numbers start to trend down below 3%, the Fed will be reasonably satisfied with that. This is going to take time to churn through. We just have to wait and see how the economy reacts to 5.5% overnight lending rates. 

Consumers seem to be very resilient on spending, but that's going to wear thin in time. That's when we're going to feel more comfortable, when the Fed and other central banks see an end to the hiking cycle.

He got it a bit wrong too. He anticipated China to come back much earlier, and clearly that hasn't happened. Still thinks it's possible. China's cut interest rates and there are other measures to come to stimulate that economy. They do need to stimulate the economy, which would in turn drive the resource-centric Canadian economy.

Preferred share market has been under a lot of pressure, very volatile. Tends to trade with the broad markets. When there's tension in the broad markets, the reaction of preferred shares is heavier because it's a thin market. Retail investors unloading at tax-loss selling season can drive real price dysfunction in that market, which is unfortunate.

The market's only going to get smaller, as a number of the big banks have redeemed their preferreds and are shifting over to hybrids and other methods of funding. You can get a fixed rate or a floating rate (rate reset) type. He likes rate resets when rates are going higher, as the preferred shares will reset to a spread above the BOC rate. 

From this level, we could see a little bit of capital appreciation. It really depends on the type you have, and you have to really be aware of the different features of each.

He'd say we're going to get a re-steepening. His feeling is that the long end of the yield curve is actually going to shift higher, flattening out on the short side. That's where your risk is buying long bonds. Maybe not so much on the GOC or provincial side, but on the corporate side. 

Corporate side you get the impact potentially of re-steepening, which increases rates but decreases price. You could also get the impact of spreads widening.

His philosophy has been to stay short-duration bonds, of 1-3 years, and to wait out those maturities. On some corporates you can lock in 6.5%, government's are closer to low 5's. It's a reasonable place to hide out. If we see a recession, we could see a re-steepening at that point.

You're right. Rate resets in this environment should do much better. It's a very thin market, going from around $80B to somewhere in the $50s. Especially for taxable accounts, the after-tax yield is quite high.

WTI is trading pretty close to its lows, coming off $105 over the past year. OPEC+ is really trying to control supply and inflate prices where they can. Energy companies look extremely affordable, with some trading at 2.5x cashflow. He's slightly below market weight on energy exposure, and that's split 50/50 between pipelines and producers. 

We have to wait for the elephant in the room, which is China to come back to the table. That's where the demand dynamic starts to shift. Supply is coming down and producers aren't drilling the way they were before. We're not getting new production of energy to support lower prices, we're getting the opposite. 

It's hard not to be concerned in the market. Every day, you're fighting to stay positive. He's not fully 100% bullish.  There are things he's worried about, such as inflation and interest rates. 

If you look at the history of the stock market, the outsized gains have come from a small set of companies, so it's not totally outside of normal. The beauty of investing is that you can have an investment that goes down 100%, but if you're a long-only investor, you could have something that goes up 10,000%. Hopefully, you can find some of those in your lifetime and it makes a big difference.

Shorter term, some research shows that the top 10 stocks make up about 32% of the S&P 500 gains in every year since 1995. He wants to see breadth expand in the second half, but he's not scared by the narrow leadership.

It's a reversal of last year. All markets are dependent on interest rates. We went through this period of worrying about rates and inflation. We're getting past that, though there's still work to do. 

If we think about tech as a longer duration asset, which is to say that a lot of the value could be in the outer years, that's why those stocks performed the worst when inflation was the biggest problem. 

Now they're rebounding. Part of it is a rebound. Part of it is a return to the idea that they can lead in growth also. There was a period when the FANGs were generating much better sales growth and earnings growth than the market. That's why they commanded a premium. Coming out of Covid, that wasn't the case. But now we're coming back to the same thing, where expectations have ratcheted up. We could see sales growth 2-3x higher than the market over the next few years.

There are fundamental underpinnings to the rally. It's not all fluff.

It will always depend on your own personal financial situation. Generally, one of the best strategies for non-professional investors has been dollar-cost averaging. Continually invest in the market over time, by trying to set aside a certain amount of your disposable income. 

Volatility works both ways. If you're in cash and you miss a large downside move, it's highly likely you'll miss a large upside move to the other side. It's very difficult, if not impossible, to try to time the market. Better to just deploy your cash over time.

Assuming you can afford to, automatic contributions to your investment account are great, because that takes away the decision-making every month.

Canada is known for having a tighter, more concentrated, more resilient banking sector. That's still the case. Where is the most value in the market? It's in bank and energy stocks. Extreme value plus a cyclical bent. 

Safe owning them for a long time. The one thing embedded in a decision to buy them now is how the economy progresses. If the economy gets a bit worse, it's going to be a problem, but that's not his base case.