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

January indicates what 2026 will be like, a world beyond the Mag 7, strong performance in small caps and outperformance in the equal-weight S&P vs the S&P. Tariffs have been noisy, but have attracted capital to the US while legislation will stimulate the economy for poorer consumers. January so that start of a move into small/mid-caps that will continue. A reindustrialization of the US economy is driving this cycle. The poorer consumer is hanging in, not concerned.

He doesn't know how to value this asset, and can't explain why it's going down or how it can go up. Doesn't invest in this.

S&P equal weight because of earnings participation from the 493 non-Mag 7 companies.

Lots of reoccurring geopolitical intrigue. Under the surface in the market, a lot of long-established trends are starting to quiver a bit. 

Notably, seeing signs of US equity market broadening out -- the proverbial rising tide lifting all boats, rather than just a select (and magnificent ;) few. This is a fresh and welcome sign. The Mag 7 are down low single digits YTD. The S&P 500 was down 1% as of last Friday. However, the equally weighted S&P 500 is up ~5%. Even more telling is that the Russell 2000 is up 7-8%.
 
As to the sectors, we're seeing leadership invert from what we saw last year. Energy and consumer staples lagged last year, but are now at the top of the leader board. Technology has become the laggard YTD.

It's rather a Goldilocks environment. We have economic growth accelerating, inflation moderating, and most likely a more dovish policy stance by the US Fed. Canada's already been there for longer. This tends to be an environment where markets broaden out.

As opposed to markets led by a small group of stocks, markets with broad-based leadership are fundamentally more robust and show greater underlying health and resilience. One analogy is that in battle, the troops need to advance as well as the generals.

His team was seeing a lot of inflection points in things like manufacturing vs. services, and rotation from software and the Mag 7 into old-world economy businesses and hard assets. There was trading ahead of the frothy blowoff in gold.

His firm had probably twice the level of activity in their two equity mandates. Volatility means opportunity.

The debate in Silicon Valley and on Wall Street is how disruptive is this next wave of new technology going to be? Here's an example. At his firm, they're looking at software with a bunch of agents that would replace a dozen analysts that would normally be hired to scour stocks and come up with opinions. But then he asks himself if that AI agent tool will replace a Bloomberg Terminal?

There's some disruption definitely coming, and right now the market's debating what that means. There's an ETF named IGV -- a basket of all the software players, from MSFT down to smaller ones. In a thing like CRM (customer relationship management software), is a company owner going to build their own? Or just buy something already out there? It's going to be measured in years, and maybe decades, before it really has an impact.

Last week, he picked up a few names in software whose stock prices have been halved.

Once a year, they go through actual numbers relative to what the models told them. Biggest factor is the birth/death (of companies) model. If, say, permission was granted to open a new retail store, they know that type of business usually employs 10 people. If it employed only 6, then they have to adjust the numbers.

Last year's total was a gain of only about 600k jobs. Revised numbers might show that the US economy actually lost jobs last year. Last week some labour data suggested that labour markets were weakening, and that could have been a catalyst for some weakness last week. 

There's a lot of momentum in the one, big, beautiful bill. Earnings are still OK. But we're starting to see some decay in the labour market.

The follow-up question is whether you're a trader or an investor? If you're an investor, and you're buying once and holding for several years, it almost doesn't matter. 

Look at the company that's issuing it. If it's Vanguard, Blackrock, or any of the big ones, they're not going away and will be around for a long time. If it's an upstart ETF company, there's a viability threshold where it either makes a profit or the company goes out of business. So you have to look at the firm overall, it's not necessarily about the ETF.

But if you're a trader, there's not a lot of $$ in the ETF, and the bid/ask spread is 5 cents in and out, then that's a far bigger cost to a trader than the $10 you pay your discount broker to trade in your account. With Canadian banks, for example, the ETF doesn't have to be huge because the underlying stocks are very liquid.

One of the benefits to a CDR is that it does hedge the currency, though there's a cost to that. It's embedded in the return you get. But that's really no different than owning it in the foreign currency. Another benefit is that you can buy fractional shares, in case you can't afford a full lot of a US share that trades in 100's of US dollars.

There's no tax benefit at all. On the currency side, you'll save $$ if you're an active trader.

BRK.B will give you this compounding without the withholding tax.

Global X has a series of ETFs that are corporate class, done with total return swaps. That means that there's favourable tax treatment because there's no annual distribution. You can get exposure to markets in the US and Europe without having the annual distribution. You get the total return minus fees, and it's more tax-efficient. Take a look at the suite they offer.

Labour Market

Last year, we started talking about the weakness in the labour market. We were worried about the end of the business cycle coming. 

At the end of of the business cycle, the last thing to drop is the employment situation. The Fed Reserve paused rate cuts because they were worried about inflation. At the same time, their dual mandate means they have to balance unemployment with that. Of late, they're saying that the labour market's a bit better. He looks at the numbers and shakes his head. The labour numbers are getting very weak structurally.

The first chart he's brought along is of the JOLTS data. Pretty significant decline in availability of jobs. With immigration trends plus the impact of AI, the size of the labour force isn't going to grow much anymore.

The next chart shows initial claims -- when someone gets laid off and initially applies for benefits. Historically, these are extremely low numbers relative to past cycles. The low 200's is very benign. Company's aren't laying off people, because it's so hard to find qualified workers. 

The last chart he has shows the continuing claims -- once you've been laid off, how long will that last? That number has gotten better. The downtick in the chart means that people are starting to find work and so the claims are coming down. That's good.

Here's what he's looking at from a market perspective. Two ETFs to look at. RTH -- market-cap weighted, with the big names you'd expect (WMT, HD, COST). Chart's ripping very strong, retail stocks are doing very well. When this starts to falter, it means the consumer is starting to falter. The top cohort of earners are not continuing to spend. The second ETF to look at is RSPD -- equal-weight retail. 
 
Keep these two ETFs on your radar. Don't go out and buy them. Instead, use them as warning signs. When these fail and roll over, it tells you the labour market's starting to turn. Consumer stocks and the rest of the market will be going with them.

Some buyers incorrectly thought Bitcoin was a store of value have moved into gold in a massive drawdown. Bitcoin should bounce though.

Anytime there's a massive selloff in 1 or 2 sectors (and we're seeing it in everything from bitcoin to software), all of a sudden those foreign consumer stocks start looking like shiny stars. 

Message for investors:  Diversification should always be part of everyone's portfolio. There's no way investors can react fast enough to reposition themselves when things fall off a cliff the way we've seen happen.

For sure there's value. Anytime the pendulum swings too far in any one direction, opportunities are created. For him, the opportunities are in the best of the best such as MSFT and ADBE. He's looking at other names as well.

The concerns about AI encroaching are overblown, but a lot of these companies are already incorporating AI and are among the leaders in AI. Reality is that the business customers of these companies are going to need an integrated solution; they're not going to do it on their own.