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

Upcoming US Federal Reserve decision on interest rates is very important for direction of the economy. Potential for continued interest rate increases if inflation doesn't slow down. Unemployment levels are still very good in Canada & the USA (more reason to increase interest rates). Consumers spending appears to be resilient which also points to rising interest rates. Concerns that people are drawing on savings built up through the pandemic. Stats are pointing to increasing credit debt levels(deliquesces still low).

It's a battle between positive sentiment vs. economic numbers, from now to the end of the year. If the S&P can maintain current levels by Dec. 31, she would be thrilled.

He's generally positive about the rest of the year, given lighter than expected inflation numbers last week and December seasonality. That said, rates will probably rise 50 basis points in December, 25 in February and maybe the Fed will then pause.

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Negative market mood and inflation. We'll probably be here for longer than people think. Issue is that central banks, particularly the Fed, have made it clear they want to get inflation under control. They'll continue to raise interest rates until they see inflation subside reasonably, not for just a month or two. And they're going to have to slow down the economy to do that. The actual rate hike number doesn't matter, because the end goal is a higher number than people are thinking about. Talk about pivoting is not going to happen until they see these numbers come down. We have to go into next year before we see interest rate increases pivoting or stopping around the world. Inflation is moderating, which is good. But high inflation is a very difficult thing for the economy and for lower income earners. Once it becomes installed in people's thinking, it's even harder to get rid of. There's real pressure to keep those rates high.

Earnings valuations vs. the S&P. The issue with earnings multiples falling is that the S&P has fallen, but the earnings underlying it haven't. It was trading at 23-24x at the beginning of the year, and now it's trading at 15x. Earnings growth has fallen only 5-6%. You have to see earnings come down. The opportunity today is to do the work on good companies that you really want to own. Earnings will come down if we go into a mild recession, so it gives you a chance to buy really great companies at much lower multiples. You get those opportunities every so often, and this is one of them.

Where to hide in a moderate recession? A moderate recession lasts for a couple of quarters and then you drive on. Historically, you want to be in defensive stocks like pharma. He'd argue that you should buy good companies with good businesses. Take a look at them, because now you have the time with all the volatility in the prices, and you may be able to buy them at cheaper multiples. Build a portfolio of good businesses over a long period of time. Hard to hide in any specific sector, because everything's doing poorly except for cash. Interest rates are impacting everything from bonds to equities to housing, so it is hard. But it's still a good opportunity for those with a long-term view.

Oil stock ideas. Don't need to go internationally to own oil companies. He owns CNQ, a great business that's executed and acquired well. The whole complex has come down a fair bit over the last little while, reflecting slower growth. Oil will be tighter than people think. Oil may be higher, but not substantially. SU is another one to own. After 2020, they all cut capex, paid down debt, bought back stock, increased dividends. They continue to do all this. Will continue to throw off lots of free cash.

Ideas in the automotive sector. Doesn't like anything in that industry. Cheap, but for a reason. Larger OEMs have lots of issues to deal with, especially being both combustion engine and EV engine companies. Trying to juggle 2 balls at the same time. Dealerships cause legacy issues. An EV engine has 20 parts, basically a battery and a computer, whereas a traditional has 200. TSLA is much more difficult to compete with, has such a commanding lead. You can buy a Tesla online, but you can't do that with a Ford. A tough industry.

Impact of higher rates on mortgage losses? Mortgage industry is very different from that in Canada. In the US, banks secure most of their mortgages off their books. The banks are much more cautious, given what happened in 2008-2009. If they think they'll have problems, they'll probably over-reserve. They can do this by stopping buybacks and dividend increases. In good shape that way, and they're not seeing as many esoteric mortgages as they did years ago.

Lower US inflation number last week caused markets to swing violently. We thought coming out of the US mid-term elections, things would calm down. But then the CPI came out, treasury yields had the 17th most downside move since 1980, and the 9th largest daily decline in the USD since 1980. The S&P runup was the 15th largest 1-day rally in that same time frame. Almost feels as though we spent the better part of the year selling on rallies, and last week everyone was buying on dips, and it still seems to be that way. Great opportunities to make some money in the market.

The Fed. It's still going to be raising interest rates in its bid for a weaker economy. Consensus seems to be 50 bps on December 14. Lots of water to go under the bridge until then: another CPI number, non-farm payroll at beginning of December. There's a lot of volatility that's not going away.

Lower USD good for tech? Yes, as it raises foreign revenues. You can see that correlation on the USD index and on the CAD. As the CAD starts to strengthen, that really gives a boost to the stock market.

Portfolio strategy in the face of declines. Many of the tech stocks are anywhere from 40-80% down from highs of November 2021. SHOP, down 75% in the last year, is a poster child for this volatility. He understands the business model and the intrinsic value of the companies he holds. The way he sticks with a stock is through a hedge overlay, and so his fund is down only 4.3% compared to deeper declines on the indexes. What he's lost on the underlying stocks that he really likes and believes in their intrinsic value, he makes up for on the other side with the short equity index overlay. Right now, his overlay is sitting around 30%. When participating in the tech arena, it's important to protect what you have. A lot of the tech names are more trades than investments. A year ago, runway for a lot of names was only 10-15%. Now, the runways can be 40-60%, so now's the time to invest.