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

Markets. Lots of volatility. Stocks and bonds have been challenged this year, due to higher interest rates to combat inflation and less liquidity in the overall market. Volatility likely to stay high. 90% of days in 2022 in the S&P 500 have had a swing of 1% or more. Running out of places to hide. Historically, we've seen pretty significant bounces in the second half of the year, and there's a good chance in 2022. What will drive that is a possible peak of inflation and the earnings trajectory.

Oil in the second half of 2022? Until the last couple of days, energy had been the best performing sector by a wide margin. Energy was up 20% in both the US and Canada, whereas the broader indexes are down between 10-25%. Energy may consolidate for a while; the fundamentals look quite good. Market is tight, not a lot of new production coming on. Medium-longer term, the price should remain elevated. Short-term, fears are triggering some exaggerated moves. Be a bit cautious in the next few weeks and months, but over the next 12-24 months it should be a good outperformer versus the broader index.

Energy sector. With energy, the market should be higher for longer. Pretty good demand profile, despite any slowdown. Not a lot of new production growth. Volatile year, war premium on prices. Companies should return cash to shareholders. Recent volatility may be due to profit-taking on sectors that have held up best. If volatility continues into the third quarter, you want to buy back into the higher quality names. Small-mid cap stocks are the most volatile, but give the most torque to the upside.

Names for industrial exposure? Look to names such as WCN, CP, or CNR. All 3 of these names have good long-term economic moats, generate free cashflow, fairly high quality, can see earnings growth over time, and have sold off with the broader market.

Canadian telcos. Not a ton of downside. Have done relatively well. Good dividend payers. Continue to grow businesses at a fairly stable clip over time. If volatility continues, capital will move toward them. If things start to turn around, they may well lag, but you're not going to lose a lot of money owning BCE, RCI.B, or Telus.

Technical analyst Tom DeMark forecasts when markets will change course DeMark's indicators point out that the Dow could have bottomed last month or it will ahead. He expects more choppy trading in the Dow this and next month, with a rally at the end of July, then a decline to a newer low in August, but a strong rally in September and October that could recover 55-60% of the entire 2022 decline. His downside target for the Nasdaq is 10,515. He agrees with DeMark that the S&P has already bottommed and we are looking at an incredible trade.

Worries of a recession persist even on a positive day like today. The US Fed needs to tame not only commodity inflation but wage inflation as well. To be fair, the Fed could not have predicted the post-Covid war, the Russian invasion of Ukraine or China's strict lockdowns. He can't tell if we're heading into a recession or a soft landing, because the Fed may have already won its war against commodity inflation and it certainly beating housing inflation and may soon beat wage inflation. The stakes are high. The banks will report soon and he is optimistic about the earnings they will report. Tech will bifurcate between profitable stocks which will rally and non-profitable which will fall further. Stocks now reflect a recession. So, if we get a stagnant economy that will re-accelerate, then stocks will rally. But if the Fed hits us with several more rate hikes, we will see more downside. He predicts the former.

He's seeing a lot more value in the markets after this strong sell-off. He's chipping away at these companies at or below his fair-market-value estimates. He is sector and geography agnostic. He looks for strong and predictable returns on capital, and the founder is still involved (i.e. managing it). He's not looking at sectors per se. We're already in a recession, probably since the middle of Q1 earlier this year. A market downturn can be your best friend, which sounds off-putting. Investors should focus beyond the next 6-12 months, which he realizes is tough to do. But investors can look forward to better returns in the future. No idea if there's another leg down in the market though.

Gold and oil outlook in Canada No idea where either is going. But doesn't see sustained long-term upside or downside. A company can be the best-run oil company, but they don't control the price of what they sell. We are in an economic slowdown, so oil won't fare well. If the Russian war is resolved, oil prices will fall. To own only oil and gold is risky.

Inflation continues at a fairly high rate but there have been some price declines in some commodities, used car prices, shipping rates. The two biggest areas of inflation are food and shelter which will likely continue for some time. Consumer and business sentiment are at all-time lows which historically means that the market could be near the bottom. This could be considered a bright spot in the market turmoil. Feelings are very pessimistic everywhere which could mean a better second half. The short term investor should continue to trade the sell-offs and rallies, For longer term investors, one to two years, there is lots on sale.. Some strong companies are down 50, 60 or 70%. Investors can take advantage of the very negative mood in the market.

The question was on Canadian banks. There are recession worries so the banks are trading at quite interesting yields, historically. He recently added BNS and BMO to the Income portfolio and will add more. With a long term horizon, 5 to 10 years you will have a great yield.

It's breathtaking how yields slid this week. (The U.S. 10-year fell below 3% today.) If you go back to November 2018 to the highs of June 2022, the 50% retracement for yields is 2%. Those two dates were a double top for yields. He expects a respite for yields as commodity prices (gas and wheat) come in. This may convince Jay Powell to take his foot off the gas and result in yields come in from here.

Markets 2022: The Road Ahead. Topics include Federal Reserve rate hikes, Covid 19 economic fallout, Russia-Ukraine war, sanctions on Russia, inflation, market volatility. The guests today are: Earl Davis - Head of Fixed Income & Money Markets, BMO Global Asset Management Patricia Perez-Coutts - Portfolio Manager, PenderFund Capital Management John Zechner - Chairman & Founder, J. Zechner & Associates

It's been a wild ride already this year. Patricia: This is not the first time it's happened. We have to be patient investors at all times.

What does your world look like? Earl: He feels like the fixed income guy crashing the equity party. We'll see peak yields for the year shortly, by the end of July. Things will then calm down until January, when there will be a re-evaluation, depending on where inflation is. Base case is higher rates, not just for 2022, but also for 2023. The storyline will continue for the BOC. 75 is the new 50. He sees at least 2, and then they go back down to 50s. It depends when peak inflation hits, which he sees as September. But if it's not, then all options are open.