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

Educational Segment. At the beginning of the year, US $175 was the target for EPS for the S&P500. This year, we did better than that. What was not counted was the massive stimulus bill from Biden that filtered into earnings. In 2022, estimates are now $230, which puts the multiple at 20x earnings and S&P around 4,600. This seems more reasonable than 22 or 23x that markets are trading at now. Next year, we could see earnings grow and multiple come down a little. Largely a flat year.

2021 surprising in terms of market performance. S&P has had over 15% annual return for 3 years. Next year will be difficult since we have the highest market valuation since the 2000 bubble. There is a challenge of earnings continuing to rise at these rates. Earnings increases will need to come from increases in profit margins which are already at high levels. There are rising infrastructure costs as well as wages. Banks should be the best sector to benefit from an inflationary environment.

Amid today's selling, keep calm and carry on. He caught Covid last Thursday, suffered a cough and scratchy throat, but his symptoms cleared by Saturday. He is triple-vaccinated, so he suffered mild symptoms. He advocates jabs. He tested positive today, but feels okay (and still doing today's show). That said, he worries about rising hospitalizations...The collapse of Biden's bill today would have boosted the economy. Pity. Do not dump your stocks, but add selectively and opportunistically. Healthcare and packaged goods are places to pick, as well select tech names like Micron. Tomorrow marks the traditional start of the Santa Claus Rally for the last 20 years almost every year, even during the Great Recession of 2008. He thinks markets will bounce.

Central banking policies top of mind the past few weeks. US Federal Reserve hawkish announcement worth noting. Leaning towards a defensive portfolio in light of inflation. Feels equities are the best use of capital at the moment. Cash and fixed income low returns. Avoid uncertain business models, or low yield businesses.

Thinks that energy infrastructure, financials and REIT's are attractive outlet for capital.

It'll get harder to pick stocks as the Fed tightens. Raise cash to buy dips, if you're afraid the Fed will raise rates fast like they did at end-2018, but he doubts this will happen. Powell learned his lesson in 2018. Instead, Powell will likely slow the economy until the industrials and retailers start missing their earnings estimates. Don't quit, but rather buy safe stocks like McDonald's, Pepsi, Eli Lilly and Costco (maybe Walmart). Or you can be aggressive to plan for the end of Covid, though that's hard to picture now. You can plan for a scenario where the tightening cycle won't be as harsh and people return to work in a soft ending. Then, buy tech like Amazon, Marvell, AMD and the autos, like Ford. He owns all these names....Technical analyst Larry Williams predicts a Santa Claus Rally and to buy next Tuesday. There have been riskier years yet there was still a SC Rally.

Inflation. He hasn't changed his tune on that. Investors have benefited from loose monetary policy that's created asset inflation, in both stock and real estate markets. Now seeing cost push inflation caused by supply chain disruptions. A lot of that will flow through. Fed and BOC have dropped the word "transitory", but he hasn't changed his view. We'll end up not so far from the 2% target that central banks are looking for. The bond market agrees with him. If inflation were the big worry of the day, bond market would show a much steeper yield curve, but it's not.

How long will it take this environment to play out? It's already gone on longer than anyone thought, so it's difficult to pinpoint. Are we going to get further into the Greek alphabet with variants? Things aren't back to normal. We have to be patient. Position for the future, and be patient for things to work out.

Sector positioning. Barbell approach has worked for the last couple of years. Everyone was surprised in Spring 2020 that markets reacted so favourably to the at-home-type stocks. He set up a mix of growth stocks with pricing power and multiples of GDP along with value stocks like industrials, banks, and materials that do well in an inflationary environment.

Time to take profits in an RRSP? He believes that one should always be fully invested, but this doesn't mean all in equities. Strategically, you should have your asset mixed defined and not try to tactically outsmart the market. Take a portfolio with 30% US equities, 30% Canadian equities, and 40% fixed income. Don't try to guess where the market's going and alter that asset mix. An investor with an RRSP is not yet of RRIF age (72), and they still have a good long runway ahead to invest, so just continue with what your asset mix is.

Portfolio construction. Use the tax benefits of the investing "bucket" to decide what portion should be overweighted. Consider a portfolio with 30% US equities, 30% Canadian equities, and 40% fixed income. TFSA should hold the most aggressive investments. Put a lot of your 60% in your TFSA. As well, you can be more aggressive in your cash account, where you have capital gains and dividend tax credit relief. In your RRSP, be a little more conservative, with more fixed income than the other accounts.

Under water. Stay or go? If you're in something you're uncomfortable with and you're under water, you want to think about tomorrow and the future. If you have a loss, do the best with it that you can. If it's where you are, then stay there. If it's not, then move on.

Stock's done well. Buy more or sell? Don't buy a company and put it in a drawer. You look at it each day and do an analysis in real time. Things change, especially valuation. Something that rises in price rapidly often falls in value. He has lots of companies he still likes, which have done well, but he sells because of price exhaustion. Stock's risen to a point that's not likely sustainable. It's trading above its normal range of valuations. As a stock continues to do well, you should have rules on the table that tell you if it reaches a certain percentage of your portfolio, you're going to trim it back. This is a portfolio risk aversion technique that pays dividends in rough times. For example, he's owned AAPL for 15 years, trimming it 7 times. If you don't do that, you can get a risk profile that's uncomfortable. It's a balance between doing well, doing well for the long term, and protecting your capital. That's the important concept of balancing risk and reward.