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

Evaluating Growth. As investors, we need to evaluate the quality of a company’s growth which ranges from:

1. High-quality (capex as a percentage of revenue usually less than 5%): which needs minimal capital to achieve high growth in industries such as software, med-tech, strong brand name consumer products, etc.

2. Acceptable quality (capex as a percentage of revenue usually from 5% - 15%): which requires capital, but offers an appropriate return usually in industrial, retail, railroad, freight, etc.

3. Or the worst of all growth destroys value as the company requires significant capex without good enough returns, most often found in industries such as energy, airlines, telecom, etc.
Unlock Premium - Try 5i Free

Inflation is the big driver today (US inflation came in as expected at 4%, but lower than before and on the right track). The markets expects the Fed will stay on pause and see what happens. Recently, the Bank of Canada slightly surprised the street by raising rates in reaction to an increase in Canadian inflation. With rates flattening, income investors can buy corporate bonds and even GICs at 4.5% to 5%. Not a lot, but still a decent rate of return and safe.

Although S&P 500 entered "bull market" last week, believes market will expand in terms of performance.
Expecting other sectors of the economy to perform better going forward.
Certain tech stocks still offer value for long term investors. 
China re-opening good for the economy and commodities specifically. 

Markets expecting that inflation will fall.
Believes market is ahead of itself, and inflation will not fall quickly.
US Fed expecting unemployment to be to be around 4%, and inflation around 2.6% (unlikely).
Thinks markets are over-optimistic, & recent market performance not sustainable. 

US Fed leaks today indicating fasted & most aggressive rate hike in history.
Research indicating that a recession is looming. 
Bullish sentiment at highest since 2021.
Markets are overly optimistic given underlying fundamentals.

Not all growth is created equally: Revenue growth consists of two primary engines including price increases, and volume increases. As for volume growth, companies usually require a certain amount of capital investment to support it. For example, in order to sell more units, a retailer may need to open another store to increase shelf space and traffic. This investment consumes capital either in the form of debt or equity (issuing shares or retained earnings). However, for a software company, it requires minimal capital expenditure (almost none) to support one more user. As a result, growth for these companies is highly scalable and valuable, as it costs next to nothing to achieve it.
Unlock Premium - Try 5i Free

The S&P hit its highest level since April 2022, but pundits complain that the rally lacks breadth and is led by tech. He replies: do your homework. Boeing, GE, Otis, Emerson, Lennard, Cintas, Molson Coores, Carnival and Paccar are hitting 52-week highs and they aren't tech.

The S&P is 20% off the October lows. Technically, we're in a bull market, but neither the fundamentals nor the bond market support that. He doesn't believe this is a true bull market. Industrials have true earnings strength, but if tech flags, he's unsure that other sectors will carry the load.

Tech, comm services, and discretionary are in a bull market, but not the rest of the market. The gains have been narrow overall. Eventually, this will broaden and the laggards will catch up. Earnings have held in and we're in the 9th inning with the Fed.

The Russell 2000 broke out last week, so the market is seeing the breadth of this bull market. That said, the S&P needs to close above 3,300, and it hasn't yet.

Five to nine stocks have led this bull market, but only in the past week is it expanding to other stocks and sectors. The Fed needs to stop raising rates until we're in a true bull market. The trick is, you need to invest before that bull runs.

Believes US Federal Reserve done raising interest rates for June.
Expecting another interest rate hike in July, or August.
Biggest mistake US Fed could make is raising rates too high (difficult balance).
US Tech is leading market, & making back losses from earlier this year.
Bull market in the USA only represented by tech companies (weakness in markets remains). 

Previous Investment Bubbles: Cannabis.

In 2018/2019, investors truly seemed to believe that every citizen of Canada was about to become a stoner after cannabis was legalized in late 2018. Sales projections were through the roof. Companies were quickly created, raised billions in capital and watched their share prices soar. Large foreign companies with billions of dollars bought into Canadian companies. Then it all popped, very quickly. What happened?

First, it seemed no company could make any money. Most companies were bleeding cash. Second, demand was nowhere near predictions. It turns out that just because something becomes legal doesn’t mean everyone is going to buy it. Third, valuations were just ridiculous. Growth was great for a short period of time, but investors simply paid too much for this growth.

Now, the sector is pretty much a wasteland of company carcasses, Canopy Growth Corp, one of the early winners, was worth more than $15 billion less than two years ago. Today, it is worth less than $900 million.

Unlock Premium - Try 5i Free

He does spend time on it, because his clients expect him to be knowledgeable about it and have something cogent to say. Still, earnings and dividends are the big drivers.

It will be really hard to bring down inflation to any great degree. So interest rates are likely to remain at these levels or close. 

Historically, these interest rates are not bad. When he came into the business, if you had 3% on short-term rates it was awesome, and 5-6% mortgage rates were standard. Things are only high relative to what we've been seeing over the past 10 years. Outside of that, they're reasonable.