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

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. The US Dollar. Just about the only thing working this year has been the US dollar, which has risen substantially against its peer group of currencies. One notable advancement has been against the Canadian dollar. The US dollar has increased from parity in 2008-2010 to $1.36 today. The rapid increase in the US dollar relative to other currencies has created headwinds for corporations that generate revenue in the US dollar and are required to convert it back to their local currency. A strong US dollar is also impacting global trade, foreign bonds, and international stock markets, as the global economy is thrown into a rapid adjustment to a stronger dollar. How far the dollar rises is mostly up to how far the Federal Reserve hikes interest rates, but it seems to us that the bulk of interest rate hikes has occurred, and what is left may have a diminishing impact on the US dollar.

Market drama, unprecedented bond losses. Going to be one of the worst years ever for bond returns. Makes sense, when we started the year at zero, and you can now buy 1-year corporate bonds for well over 5%. Means that bond prices have to drop dramatically. Good news for retirees and investors that they can now make some good money on bonds. A lot of bonds are trading below par, so they're attractive in taxable accounts. It changes the balance of how much you should have in bonds vs. equities going forward.

Market bottom? If you pull the lens back further, we've been bouncing off the bottom since May for the S&P 500. Canadian investors have perhaps benefitted from US stocks and the CAD dropping. TSX hasn't recovered from its high levels because oil and commodity prices have pulled back. If we get a sense that inflation is peaking and that the Fed is pivoting, looks like the BOC blinked yesterday, then stocks can go a lot higher. The S&P isn't going back to 4850 anytime soon, but he can certainly see a rebound to the 4000 range.

Advice for the long term. Keep in mind, the S&P went from 666 in 2009 to 4850 in 2022. Stocks do tend to go higher. A lot of people get freaked out about a really bad year and all the bad news that's piling in, and pundits who say the low is 3200 or 3000 or 2500. No one knows. What we do know is that over time, stocks tend to go higher, so own good companies.

Why buy a stock if no dividend? Dividends come from cashflow and profits. It's a company's decision whether to pay a dividend, reinvest, buy back shares, or pay down debt. Paying a dividend doesn't make a company great. Reinvesting profits makes a company great. A company like BRK obviously believes it has a long runway to reinvest or make acquisitions. If you want a dividend, trim some of the stock. It would be a tax-advantaged gain instead of a dividend. Dividends are not the be all and end all. Canadians love our dividends like those we get from banks, utilities and REITs. The best return is for the company to reinvest the cashflows in the business, not necessarily to pay out cash to shareholders. If a mature company has no growth opportunities, maybe it should be paying out a dividend.

Whether to buy more than 1 name in a sector? He generally tries to buy only his favourite name in a sector, instead of diversifying. Sometimes in portfolios he may own 2 Canadian banks. You have to determine how big a position you want and how much exposure. Usually limits exposure in any one industry to 10-15%.

Canadian banks. Impossible to time the market. Think of stocks as long-term assets and not things that trade on the board every second. Betting against the Canadian banks long term has been a very bad idea. Total returns have been incredible. Stocks have already fallen a lot. He doesn't know what will happen if we actually go into a technical recession. Canadian banks are attractive places to be and always seem to come out of problems pretty well.

Healthcare service delivery in Canada. He honestly doesn't know any Canadian healthcare companies anymore. A lot of them are very small-cap tech companies. He owns the US company SYK. He much prefers medical technology companies. Sees very strong results from pharmaceuticals this year. He finds MRK and PFE too complicated to figure out without a degree in biochemistry. It's shocking to him that anyone still owns cannabis stocks -- they're dead companies walking. No interest in REITs in the senior living space, as it's a very tough area and still recovering from problems from Covid. Most innovative, large-cap companies are found in the US, and that's where you find the best medical and healthcare ideas.

BOC rate increase less than expected. Instead of 75 bps, it was 50. Still sees more hikes ahead, until inflation cools. Markets are doing well despite a pretty tough September. October is typically the "bear market killer" -- over 35% of the bear markets since 1950 ended in the month of October. Good seasonal patterns ahead. Looking at the uncertainty of mid-term elections, since 1950 we've never had a negative return in the 12 months after. Probably because it takes some uncertainty out of the market. In fact, the average return is about 14.7%. Historically, the best year for market returns is the 3rd year of a presidential cycle. He sees market headwinds turning into tailwinds at this point.

Hunting for a market bottom is like hunting for truffles. The best time to invest is when it's the most uncomfortable or unsettling.

Tech stocks. He's not one to just buy a stock and forget about it. He more actively identifies the type of sectors and industries that perform well. Right now, his weighting in tech and communications is quite low, under 10%. Tough to own tech stocks in a rising rate environment, given that they're high growth and long duration. Tech was the leader 8 years in a row, but he doesn't think it will be the leader for a while. Tech isn't his top choice, even if we get into the early part of the next cycle.

Consumer staples weighting. Defensives have been performing well for the better part of this year. We have to look ahead to where the economy will be in 6-12 months. Inflation will ease, and banks can become more dovish. He'd start to underweight consumer staples, and move into early cyclicals.

The CAD. Against the USD, the CAD has been range-bound between 70-80 cents since about 2015. BOC needs to follow through with trying to fight inflation, same as the Fed. It used to be that energy prices would command where the loonie would go, but it's different today. Canada's very tied to the housing market as well, and that could help explain weakness in the loonie.

Air travel. We're entering an environment where people are really examining their need for business travel. So it might be weaker, relative to where we were in the past. But perhaps leisure travel can make up for that, due to to pent-up demand.