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

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Labour Market

Last year, we started talking about the weakness in the labour market. We were worried about the end of the business cycle coming. 

At the end of of the business cycle, the last thing to drop is the employment situation. The Fed Reserve paused rate cuts because they were worried about inflation. At the same time, their dual mandate means they have to balance unemployment with that. Of late, they're saying that the labour market's a bit better. He looks at the numbers and shakes his head. The labour numbers are getting very weak structurally.

The first chart he's brought along is of the JOLTS data. Pretty significant decline in availability of jobs. With immigration trends plus the impact of AI, the size of the labour force isn't going to grow much anymore.

The next chart shows initial claims -- when someone gets laid off and initially applies for benefits. Historically, these are extremely low numbers relative to past cycles. The low 200's is very benign. Company's aren't laying off people, because it's so hard to find qualified workers. 

The last chart he has shows the continuing claims -- once you've been laid off, how long will that last? That number has gotten better. The downtick in the chart means that people are starting to find work and so the claims are coming down. That's good.

Here's what he's looking at from a market perspective. Two ETFs to look at. RTH -- market-cap weighted, with the big names you'd expect (WMT, HD, COST). Chart's ripping very strong, retail stocks are doing very well. When this starts to falter, it means the consumer is starting to falter. The top cohort of earners are not continuing to spend. The second ETF to look at is RSPD -- equal-weight retail. 
 
Keep these two ETFs on your radar. Don't go out and buy them. Instead, use them as warning signs. When these fail and roll over, it tells you the labour market's starting to turn. Consumer stocks and the rest of the market will be going with them.

Some buyers incorrectly thought Bitcoin was a store of value have moved into gold in a massive drawdown. Bitcoin should bounce though.

Anytime there's a massive selloff in 1 or 2 sectors (and we're seeing it in everything from bitcoin to software), all of a sudden those foreign consumer stocks start looking like shiny stars. 

Message for investors:  Diversification should always be part of everyone's portfolio. There's no way investors can react fast enough to reposition themselves when things fall off a cliff the way we've seen happen.

For sure there's value. Anytime the pendulum swings too far in any one direction, opportunities are created. For him, the opportunities are in the best of the best such as MSFT and ADBE. He's looking at other names as well.

The concerns about AI encroaching are overblown, but a lot of these companies are already incorporating AI and are among the leaders in AI. Reality is that the business customers of these companies are going to need an integrated solution; they're not going to do it on their own.

His client portfolios always remain well diversified. 

Right now, financial stocks remain a core component of portfolios. Still sees lots of value there, in both Canada and the US. Lots of value in the consumer sector, which has been beaten up for such a long time -- trading at very low multiples, with healthy and rising dividends. This should drive value over time.

Doesn't think either of these 2 will fall. Really hard to say. They're all spending $$ because they see immediate demand, so they're going to satisfy this demand. But 1-2 years of meeting demand is not going to justify the capex that they're putting out there today.

You have to have the confidence, or make the bet, that the brilliant people at these companies know what they're doing. That they're going to spend wisely enough to get that return. A great question, but it's early days and no one fully has the answer.

A market correction is generally characterized as a 10% decline from any given point. This threshold is fairly arbitrary and doesn't actually indicate whether assets are fairly priced, overpriced, or underpriced—it's merely a label applied when values fall by that percentage. Unlock Premium - Try 5i Free

It's a year of transition. One area on the macro side is with the new Fed chair -- everyone's wondering which way he's going to tilt. Secondly, we spent the last 3 years building out infrastructure for the AI revolution. Now we have to sell it, people have to buy it, and people have to make money. We're going from a technology story to an earnings story. 

The infrastructure players sell the large-language models and all the tools that go with it (agents and so on) to enterprises. Everyone's waiting to see how that will pan out. If you look at some of the big industrial, healthcare, financial, and entertainment companies, they're engaging and employing AI.

No. His firm probably had anywhere between 5-10% of holdings across separately managed accounts and through his fund. They've taken a bit of $$ off the table, bringing the weighting down to ~5-8%.

They've taken that money and put it into those industrials, financials, healthcare, etc. that they know are using AI. That's different for his team from the last 3 years, but they think it's the right way to go.

He was going to say that he was hoping this drawdown would happen because he didn't have enough of the memory stocks (like MU, SNDK, SK Hynix). This gives you the chance to return to the scene of the accident and pick them up.

The last few months have really been mixed, with a confluence of geopolitical issues and other headwinds. Markets had a pretty good rebound off the April lows of last year, but haven't really been able to find a clear direction.

There's now a consolidation phase before, hopefully, the next run up. A necessary evil. Though not specifically what we want for US markets right now, it probably makes the next leg go higher. 

His team expects market movements as high as 7400, maybe by the end of April. Perhaps 8000 by the end of the year. This is an optimistic scenario, where good things need to happen and some geopolitical issues need to get sorted out.

It'll be a volatile year, and volatility leads to opportunity. Perhaps more of an active market than last year.

Yes, he expects more than 1 cut this year. Depending on how the nomination for Fed chair goes he expects a minimum of 2, but probably 3, cuts. 

Thinks economic growth is slowing down. Tariffs and other things do end up hurting the consumer. Later in the year, economic data may be a bit lower than people thought, and that might pave the way to another rate cut beyond what's currently priced in. 

Mixed bag. Some of the high flyers such as AMD are trading down today. Certain stocks are priced to perfection. They may not have had a bad quarter, but sometimes there's profit-taking or rotation out of certain investment types. That's just part of the market.

You can take advantage of your high flyers, repurpose that capital throughout the year and, hopefully, buy low and sell high :)