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

July was the best month in a year. The Fed's remarks this week were a soft pivot that the market liked. MSFT, Google and Amazon reported this week and missed topped and bottom lines. Yet, stocks went up. We haven't seen the capitulative flush in markets to bottom, but it has happened in tech, so he prefers tech going forward. He prefers oil stocks. Also, the 10-year yield was moving up, but is now declining. He is cautiously optimistic.

Fed rate hike yesterday. We're back in the soft landing narrative again. The path that was narrowing is getting a little wider. J Powell soothed investors and said there's no reason to hike us into a recession just to do it. They'll be data dependent. The 2-year bond was 3.15 yesterday and went down about 20 bps, which suggests the bond market believes the Fed will do 25 in September, another 25 after that, and perhaps talk about pausing early next year. Lots of people were sitting out the market, even shorting. Yesterday you saw a reversal as those shorts came off.

The bond market. It all comes back to inflation. If inflation is going to be runaway and uncontained, then fixed income will go up or down, as it depends on interest rates. If people think inflation is under control, or the Fed is going too hard, then interest rates will come down and so will bond yields. Long way between now and when we declare victory. This could be a bullish head fake. If he had to choose, he'd say we probably saw the bottom on June 16. But there are so many cross-currents going on, it's really hard to tell.

Keep traditional 60/40 portfolio for next 3-5 years? Yes. Even if this is a false dawn for equities. Even if, worst-case, there is a recession, it will be a shallow recession. There's already been enough erosion in equities, bonds, high yield, and preferred shares. These are already true levels to be building portfolios. If you can get 5-6% on high-yield bonds, and we're not going to have a nasty recession, or if you can get 4-5% in investment grade, it's a good time to start dipping your toe in. He'd be more of a seller than a buyer.

Protection strategies. Protection strategies that most people can really use are asset allocation and diversification. Having an options facility on top of that is just another tool. If he's bearish in the near term, you can sell stocks outright. If you love your stock but feel it has some downside, you can sell a covered call. That's the best way to bring in more income, especially when people are bullish on a name. You can buy puts, but that's like a gun against your head, as it has to happen and you're working against a premium. He likes picking a bottom, by writing a put to get something cheaper. Futures contracts are really for institutions rather than individuals.

Work from home. There's been an awakening. The technology is there to deliver as good a client experience as before, or better. You don't need as much of a physical presence, though you still need it for team-building and camaraderie. The model of 5 days each and every week doesn't need to be followed. We're in a different world, and the providers who enable that are going to be good places to be.

Stock price and the ex-dividend date. That's what you learn in the textbooks. If you buy a stock for the dividend, the price will be lower by the dividend once the dividend is paid.

Earnings have not been as bad as expected. We'll be bouncing for a while, not go straight up. He's watching inflation. We won't return to previous lows, but it will be bumpy until things are a lot better by year's end. He's optimistic overall.

Market environment. Interest rates are rising and inflation still running hot. Central banks are looking to rein inflation in at almost any cost, almost trading away growth to do it. A challenging environment for many companies.

Market strategy. Nice relief rally of the S&P 500, up about 9% from the mid-June lows. He gets asked every day if we've hit a bottom. Difficult to ascertain the bottom during a bear market or correction. Possible we've already marked the bottom, or we could be closer to the bottom than many expect. This bear market is 7 months old, getting long in the tooth. The last 8 bear markets have ended within 6 months. Seeing a bit of an inflection point on inflation. Gas, commodity, and lumber prices are falling. Housing is already cooling in Canada, expected to cool in the US with fewer starts and lower sales. Central banks are making a tradeoff between growth and inflation. By next year, we'll see a deceleration in the economy, and the central banks will start to lower rates at that point.

ETFs with good dividend and some growth? XEI in Canada. Nice dividends, decent growth. Top holdings include ENB, RY, TRP, BCE, TD, PPL. Yields about 5.2%. In the US, VYM, whose top holdings include JNJ, XOM, JPM, PFE, HD. High quality names, good growth, nice dividend. Yields about 3.3%.

Bond ETFs. He recently shifted into longer duration bonds. Sees interest rates leveling off, and 10-year bond yields may even drop. Preferred shares are in a bit of a downdraft, due to credit quality. In Canada, he likes ZAG, 7 years duration mostly in government bonds with some corporate, all investment grade. In the US, look at BND, same characteristics. Any downdraft in yields means a pickup in the capital.

Small vs. big names in energy. Energy is one of the favourite sectors in his portfolio. He's more comfortable with the bigger names like SU, CNQ, XOM, SHEL, MPC, CVX, COP. It's all about free cashflow. Very strong management and ability to control costs. Smaller names might give you more leverage going forward, but operations of the bigger names make more sense. Energy has been a tremendous performer this year. Pullback probably represents a bit of an opportunity.

Stocks rallied today as the Fed hiked 75 basis points. Why? "Data centric." Jay Powell said he sees robust job gains but softening spending and production. Data. Jay is now ahead, not behind the curve. Will there even be another hike? Warning: previously, markets often drop the day after the Fed announcement.