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A Comment -- General Comments From an Expert (A Commentary)
COMMENT
Markets. The market is digesting the impact of interest rates, and it's doing it in quite an orderly fashion, even though it feels as though we're on a roller coaster. Market's at a fulcrum, it wants more information. Labour numbers tomorrow. If hot, Fed will continue to force rates higher. If they're weaker, and inflation comes off the boil in other areas, the Fed may pause, and the market would really like that. We're not sure exactly where we are for the next few weeks or months.
COMMENT
Bank of Canada warning of more rate increases. A piece of ammunition that doesn't cost anything. It's moral suasion. They want to make sure people are taking the BOC and Fed seriously. If they talk tough, but act dovish, they're working against their own agenda. The big risk is that they go too far, and put us in a deeper recession than we need to be. That's been the history, because the cost of going too far is less than the cost of not going far enough.
COMMENT
Loss of confidence in currency. In going too far, you might have a financial accident that could relate to currency. Not likely relating to the CAD or USD, but international currencies are at some risk. They have a lot of debt in US dollars, and that's costing them a lot of money as the USD strengthens. Bank of England did an about face, as they saw the risk of a financial accident.
COMMENT
Healthcare vs. consumer staples. Healthcare is a better defensive place to hide. He has a 50% overweight in healthcare. Healthcare represents about 14% in the S&P, while he has about 22% of his US large-cap portfolio allocated to it. Less expensive, and growing faster and better. As inflation rises, companies are under the gun, as costs have increased but they haven't raised prices and so margins are squeezed. Coming out of inflation, input costs drop, and so margins expand. Don't get fooled by that, it's a short-duration event.
COMMENT
COMMENT
Cruise lines. Lots of worries. Is this industry really as healthy as it was in 2019, and the answer is definitively no. The whole industry issued a lot of stock and borrowed high-priced money. Not in good financial shape. The healthcare side is an overhang, and any hint that we're having Covid 2.0 will be devastating. Travel numbers are red hot, but the cruising industry isn't keeping pace.
COMMENT
OPEC to cut production by 2 million barrels a day Long-term, energy and healthcare make sense. Earnings season will be difficult. Last week may not be the bottom. Be diversified in energy--in oil, natural gas, producers, refiners and pipelines. There is conflicting policy globally, creating a lot of stress on future supplies that can't endure. We've never seen this.
COMMENT
Markets. Challenging year. During times like this, step back and look at your time horizon. Not time to panic and throw in the towel. A lot of the work should have been done ahead of this 20% drawdown to make sure you own high-quality businesses, lots of cashflow, still paying or growing dividends. Next few months are going to be quite volatile.
COMMENT
Deploying capital. If your time horizon is north of 5 years, this is a great time to start adding to your portfolio. A lot of names he's followed for years, but they've now come back into that valuation range that he considers the Buy zone. Have to be patient. Hard to call the bottom, difficult to time the market. Macro picture is still murky. If you're not in a hurry, you can sit back and wait for some of these prices to come to you, which they still might.
COMMENT
Cash weighting. Higher than normal. He looks at broad asset allocation, not just equities. For the first time in many years, cash is a reasonable alternative. GICs are paying reasonable rates, and fixed income is looking quite attractive. You can find some high-quality, low-risk bonds that are paying north of 10%. Periods of stress create interesting opportunities. He's looking to lock in some income over the next little while while volatility remains high, which should result in both income and some capital gains.
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