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

Probably not as well as the consumer thinks they are. We've come through Covid, and when people have had some of their liberties restricted, they tend to care less over the short term. They're going to go on vacation and they're going to spend. Now's their chance to catch up. It's human nature.

It's easy to panic. But if you look at the data long term, the best thing an investor can do is to get in at a reasonable price into good companies that can compound their capital. Then sit there and let it compound for as long as possible. 

Jumping in and out of the markets is a massively flawed strategy. You have to fight that inclination. If you look at the data, people who miss the significant up days in the market have returns that could be 1/3 to 1/2 lower than someone who just stayed in. What helps is if you know more about what you own, and you have companies with strong balance sheets and lots of cashflow that can survive. That gives people more confidence to sit and wait through the bad times.

What's happened this year is liquidity in markets has gone down, yet the S&P 500 is up almost 20%. For the top 5 components in there, the median return is almost 50%. These are all companies that were hated at the end of last year. Tech doesn't work in a rising interest rate environment. 

You never know when things will turn and the returns will come. So you have to get in the right way and be patient.

He prefers the software side, as it's better at compounding capital. Look at perhaps exceptional compounders like MSFT, GOOG, or CSU. Market volatility can work in your favour, as you can pick up good companies on a rough day. For example, the selloff yesterday hit those names really hard.

Difficult to make predictions or to see a pattern yet. He's looking to buy high quality Canadian equities for the longer term. Right now is a very good time to be buying, particularly relative to the US market.

So far this year, TSX is up 6%, while the S&P is up 19% and that's predominantly driven by the tech rally. The TSX PE ratio is about 13.9x earnings, vs the S&P at 19x earnings. That means that the US market is about 50% more expensive than the Canadian market. So the Canadian market is quite good value. The last time we saw this was in 1997, and then Canadian equities went on a tear and did extremely well.

Canadian market is trading at the best discount to the American market than it has in many years. Now's the time to be a little bit greedy on Canadian equities.

Dividend yield of the TSX (3.4%) is much higher than the S&P 500 (1.5%). That means that with Canadian equities, you're getting more than twice the income that you would holding US equities. With inflationary times, it's good to have more money in your pocket. For more information, see the Gauge under Insights at goodreid.com.

In general, likes them all. Over the last 50 years, outperformed the index 70% of the time. Well capitalized, impressive dividend yields. Operate in a cosy oligopoly. Big 6 banks represent 90% market share. Attractive valuation multiples. 

Risk vs. Reward:

There are two main factors to consider when looking at an investment portfolio – risk and return. It is an investor’s job to analyze where their risk tolerances lie and what type of return they are looking to achieve, and to ensure that these two values align. It is a fundamental principle in investing that a higher return is almost always associated with higher risk. It is the nature of the beast that investments which carry high returns also have higher risk, which in this case means volatility. The bottom line is that it takes large gains (100% to make up for a 50% loss) to make up for losses, so investors should always be cautious about what investments they make. 
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Fitch Ratings downgraded America's default ratings, and markets slid. the last time this happened (2011), markets rallied wand recovered within a year. He suspects money managers used today's selling to trim frothy positions. Today was a buying opportunity, but he would wait a little to see if markets decline further before he starts buying.

He predicts a short-term pullback in the S&P starting today. Around Sept. 11, there's an 81% chance of a rally into the first part of November, then a slight pullback, the the market keeps rallying. Be patient for now before pulling the trigger. His prediction is based on patterns since 1924. Also, the CFTC COT report (of spec traders) showed they were selling as the recent market was rallying, which typifies an intermediate pullback.

The 7 high tech stocks involved with AI have lead the S&P for months. Not a problem per se, unless it's the only song in the playbook. This is starting to change because other sectors are rallying. He cautions that things are a little overbought and we're entering seasonality. Plus, there are signs of exuberance. Energy, staples, industrials and materials are starting to show strength and are places to invest in the next 6 months. August-September are historically the most volatile months.

Corporate earnings the past two weeks - only 60% of major companies beating "top line" estimates.
Top line revenue downward trend means growth is slowing. 
Since inflation is falling - companies unable to charge higher prices. 
Believes inflation will be sticky, and present challenges to the economy.
Positive trends for higher energy prices going forward (oil above $80). 
Too much optimism in the markets with A.I. euphoria. 

ZWB vs. ZEB.
Question is when to use each product. 
Defensive investors best for ZWB (includes dividend yield).
Bullish investors are best to own ZEB.

Wait until recession hits before moving to a "non-enhanced" ETF.
Until then, getting higher dividend yield is good.
10-15% fall in equities possible if there is recession. 

Believes interest rates are going to go up, and recession is looming.
Hard landing will hurt the economy. 
US Federal Reserve trying to paint the narrative of soft landing.
Probability of recession has gone down according to US Federal Reserve (which is wrong).
Enormous borrowing by US Treasury not sustainable.
Higher interest rates will erode confidence in US banking system. 

Odds of a Recession: What Could Change?

The economy is still susceptible to risks if inflation continues at elevated levels, pushing central banks towards a hawkish mode. Nevertheless, the recent CPI reading provides some comfort on that parameter as well.

Another potential outcome is the economic overcooling resulting from consumers experiencing significant financial strain due to two years of high inflation and the impact of elevated interest costs. Although there might be a time delay before these effects fully manifest, the most recent job reports do not currently indicate any immediate signs of an overcooled economy.

The market sentiment is shifting. Bank earnings are coming in strong; companies are beating street expectations and many investors are revising their recession forecasts.

As we always say, time in the market is more important than timing the market.
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