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

Fears of a recession are subsiding. The economy has been stronger than he and many expected, but he remains concerned about the effects of higher interest rates on consumers and businesses. US bank earnings now show that defaults have not creeped up, but he's watching this. Caution remains warranted. We are in an indebted economy that will eventually cause problems. Inflation is down (new numbers today), but everyday there are labour negotiations and higher wages will fuel inflation. Without lower rates, the economy will struggle. That's TDB for stock markets. Canadian stocks, such as energy, are yielding 6%. That's what he cares about.

Believes effects of interest rate hikes yet to be felt in the financial markets.
Expecting tough times ahead for investors.
Implications of multi-decade low interest rates will take years to be felt.
Consumers & governments will face larger expenditures once fixed term loans renew. 
Bracing for less than stellar results in the stock market the next 3-4 years.

Waiting for market response in the next earning season.
If massive selloff, will be a bad sign for markets going forward.
Expecting tech sector to contain some surprises. 
China will be very interesting to watch.
Upcoming re-balancing of NASDAQ will hit Microsoft & NVIDIA harder than other companies.

Treasury bill/money market funds will not have as much price volatility.
If interest rates go down, value of bonds will rise.
Yield also directly correlated to interest rates.

Technical indicators pointing towards a cautious strategy in the markets.
Expecting a correction in the markets.
An ~11% fall in the markets not out of the question.
Given recent interest rate hikes - economic hard landing almost guaranteed.
Wait to invest once the markets have corrected.
Sentiment amongst investors pointing towards negative outlook.

The Market is Not the Economy.

One of the common refrains we are hearing is that the economy is/will be in such poor condition, how can markets be doing so well? Corollary to this is that, ‘markets have clearly run too high and are set to crash when reality sets in’. A lot of this also hinges on the idea that the market is ‘dumb’ and the critic is ‘smart’. Time and again though, we have learned that it is dangerous ground to attack markets with the presumption that the entire market is wrong and you are right. The moral of the story is to do your own research when deciding which stocks to invest in. Don't just rely on sound bite news that is often wrong. 

Expecting 1-2 more interest rate hikes in the USA.
Strong US economy will force US Federal Reserve to raise interest rates.
Room in US economy for higher cost of borrowing.
Relative weakness in China causing commodity prices to soften.
Recession fears also weighing negatively on metals and resources.
Equity investors in resource sector being negatively affected by inflation (higher operating & capital costs).

What is Direct Indexing?

With news of numerous brokerages going to $0 trading commissions, the trend toward direct indexing just got a lot more compelling for investors. Direct indexing essentially lets an investor buy the underlying securities within an index (say the TSX 60 or the S&P 500) automatically at their broker without owning them through some sort of fund or ETF. When you had to pay $5 to $20 per trade, this was not a particularly feasible approach. But now, with free trading commissions in the US, this strategy just got a lot more interesting and could actually give ETFs a run for their money. 

Likes Canadian banks as a group, well capitalized. Likes them better than Canadian lifecos, so she'd stay with the banks. Banks give attractive yields, and she doesn't think we're going into a deep recession in Canada or the US.

The last few days, we've had encouraging data on the inflation front in the US. CPI came in at 3%. Core was still pretty high at 4.8%, but there's a rent component (about 1/3 of the calculation) in there that's keeping the rate up. That number should start to moderate with new supply coming onstream.

This morning, we got the PPI number of 0.1% YOY and core up 2.4%, which came in weaker than expected. This is good news on the inflation front. Somewhat of a leading indicator, as it's a measure at the producer level. Whereas CPI is at the end-consumer level. Those two numbers give a positive tone to the US market in general on inflation. If producers aren't facing higher prices, then they're less likely to increase prices for the consumer.

Right now, consensus is that the Fed will continue to raise by another 25 bps at the end of July. We'll see if that actually happens. 

It's going to be very important to hear what the companies are saying in terms of cost and materials pressure. Is labour inflation starting to moderate? What are they seeing in the economy? What are their capital expenditure plans? What they spend is another company's revenue.

Q2 earnings are forecast to be down by 0.5% YOY. This would be the third quarter where earnings are down, and this one would be the worst. Earnings for Q3 and Q4 are supposed to be turning positive. For the year as a whole, earnings for the S&P 500 companies are seen to be slightly up, and up the following year.

So right now, the market is baking in a soft landing. Typically when there's a recession, corporate profits will turn negative for the year.

Today's topic of the day can quickly displace previous topics that we thought would last for a while. Regional banking issue in the US was a watershed moment because the Fed took its foot off the accelerator of tightening. 

He looked at the moment in time when the big technology stocks took off and left the rest of the market behind, which was early March, and it was almost to the day that SVB went under. It signalled that AI was rearing its head, but that the Fed would become more accommodative because of the problems created by an accelerated move higher in interest rates.

See his article at goodreid.com, under Insights, "US Market Bifurcation: A Story of Two Markets". The story is about those very few (6 or 8) companies that are responsible for the vast majority of the gain in the US equity performance in 2023. The good news is that whenever this has happened in the past, the leaders haven't fallen back to the pack but, rather, the others have caught up. 

To investors, you want to understand what sectors haven't performed well. Healthcare and energy. They've trailed, multiples are at historic lows, strong fundamentals, very good opportunity there.

He doesn't see a prolonged downturn. If you look at sentiment indicators and the AAII numbers, bullish sentiment is at the highest it's been since early 2022. Might indicate the markets are a bit ahead of themselves, which is not unusual. 

At some point, we'll have a normal bull market correction. That's healthy for the market, and it's a good opportunity for those who've been hesitant to enter the market.

You have to be very careful of buying into a company that has a sparkling dividend yield. It has to be supported. If it's not supported, then pass.