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

Awesome question. He has a whole bunch. The magic words in investing are "all things being equal" -- assumes the news on a name and on the macro are the same in January as today.

#1 would probably be Telus. BCE is also in there. Names like AC, MFI, PRL, GSY, WFG, and TFII. All of these stocks are cheaper than they ought to be. If you want to take some real risk, look at DND or NFI (but that's a whole separate risk category). All things being equal, those names should be higher in January than they are now.

Don't do stop losses for stocks like KEY or GEI. If you don't have conviction in a stock, you don't want to own it. If it goes down 10-15% (which is very unusual), or even 30%, it doesn't mean the news flow has changed for a good stock. Instead, follow what you own -- if you don't like what you're seeing, start paring it back from a conviction rate of 8/10, to 7/10, to 6/10, etc. Don't get snapped out by the market.

Stop losses sound really good, like an elixir. But you get stopped out, and then the stock starts to come back. When do you get back in? You get in and get stopped out again. They do so much harm. If you're going to trade leveraged futures, such as oil or bitcoin, then you can use stop losses. But not for good companies that are paying you 6-7% to wait.

She wishes she had just a fraction of the optimism that the market has. She'd almost say that it's blind optimism. We're back into this "good news is good news, and bad news is also good news". 

Yesterday there was the ADP payrolls report, which was pretty bad. What did the market do? It rallied, because "hurray, we're going to get a rate cut next week". Today jobless claims fell, and that was good because the market said "hurray, the economy's actually doing OK -- we're not losing jobs, we're just not adding them".

She's been saying this for over a year, but at this point the market's disconnected to the economic fundamentals. That gap keeps widening, yet the market's just looking for any opportunity to grasp that optimism and keep it going as long as possible.

After the government shutdown, we started to see some economic data roll out. The first jobs report that came out was actually positive. The market got jittery because it worried that there wouldn't be a rate cut in December. Right now the market is so dependent on a rate cut, that's what's driving the market rather than the fundamentals. A cut next week is priced in. Her question is, what happens after that?
 
In Canada we've been consistently cutting rates for the past year, but it hasn't necessarily helped our economy. Just because the Fed Reserve is cutting rates, that's not the saving grace that will save the economy from a recession. It will be a part of it as rate cuts try to stimulate the economy, but it's not the be all and end all.

It's actually pretty healthy, and that's what the market's telling us. If you go back 2 weeks, or even 1 week ago, the NASDAQ and the S&P went through support and looked to be going a lot deeper than just a 5-7% correction. 

But we got some good reports coming out of the AI ecosystem, and people got back on the horse. NASDAQ's gone up the better part of 800 points in the last week. Wouldn't be surprised to see some consolidation.

The whole unwinding of the yen carry trade usually takes some time to work through. So over the next couple of weeks we'll get some consolidation. In the last couple of weeks of the year, we could get a pretty decent rally.

Over the last 3 years it's been pretty phenomenal. But he looks at 2026 as having quite a change in leadership. 

For the better part of 3 years, we've had this whole compute infrastructure buildout. Certainly for AI -- data centres, cloud, and so on. Thinks what we're going to see in that space is a bit of a consolidation. People will be looking for optimization of what they have -- getting more money per dollar, per watt, and so on.

Going into 2026, there will be a sea change. A bit of a rotation in the tech arena. You're definitely going to have (and already starting to see) a lot of autonomy coming on. For example, in the likes of robotics and software agents. But you'll also begin to get large-scale industrial deployment. 

Finally, you'll start seeing AI through the economy and through companies. It'll start with the large ones first, as they have the deep pockets and have been able to spend the money. Then it will broaden out to medium- and small-sized businesses. We'll be seeing tangible economic gains in these companies. That's going to be a big deal for 2026. Already seeing it in financials, healthcare, transportation, and entertainment.

It's been a strange year. Canada-small- and large-cap--has outperformed the U.S. Within Canada, small caps have done very well, but the breadth is narrow--80% from mining stocks. Small-tech Canadian tech hasn't done as well. He won't call an end to the mining rally either way; these rallies happen every 5-7 years. Though, fundamental buyers are looking profitable growth stock with low valuations outside mining. The set-up for 2026 in small-cap growth is excellent.

As long as 2025 holds, we'll witness a rare threepeat of double-digit earning gains. But the easy money is over after that multiple expansion plus earnings growth. 2026 will rely on earnings execution by leveraging businesses through gen-AI. Watch financials and healthcare for productivity gains. The million-dollar question is whether the consumer will be resilient. Some manufacturing numbers were weak, while the labour market is okay. Also watch inflation--what will the US Fed do, given de-globalization and tariff uncertainty. Rates will come down in Canada and the U.S. in 2026, which will support the market. He tries to look past the noise coming from America. 2026 earnings estimate is 9-18% growth, a wide margin, depending on the consumer and productivity.

"Consumer sentiment" is all-encompassing -- it's about jobs, cost of living, everything combined. Consumer sentiment surveys have been the weakest they've been in decades. The average consumer is not doing particularly well. The high-end consumer's doing pretty well, but their sentiment readings are down too.

When we get reporting of data, it's in nominal terms. Naturally year over year, more people are going online with their shopping. The numbers don't neutralize for that year over year, so you don't know what the volumes are. You hear a dollar number, which is going to be up YOY due to natural growth. But you don't know how much is inflation. 

He'd say that the retail numbers have been soft-ish. On a nominal basis if it were up double digits YOY, that would be pretty impressive. High single digits would be on the disappointing side.

The numbers show a softer start, so we have to look at why that is. There's uncertainty on lots of fronts. Look at the credit card companies and their default rates. The bottom half of consumers are struggling way more proportionally than the top 20-30% of income earners who are keeping the party going. 

While the nominal number for total sales goes up, fewer and fewer people are driving the economy.

A week and a half ago a cut was off the table. Then we got some Fed talk. We think we know who the next Fed chair will be (see the Educational Segment). So the bias is tilting with the Fed speak we got last week.

The Fed meeting is December 10; the blackout of 7 calendar days beforehand brings us to this Wednesday. In the next day or two, we'll get a little more insight into what the president and the governors are thinking, and then they can't say anything for a week before. As of now, it's about an 85% chance of a rate cut. 

Doesn't see any real and reliable data that would shake that. We have been getting weekly data from ADP, which is telling us that the labour market (on a broad basis, non-governmental) is slowing significantly. From that perspective it's not the "official payroll number", but the Fed can rely on data like that if they're looking for a tilt.

He doesn't think it will matter too, too much if they cut at this meeting or if they don't. They could wait for another meeting to get some government-driven data.

European banks are generally cheaper than US banks. But not as much as they were years ago when we were worried about systemic risk in Europe. Another component to consider is currency. As a Canadian, you're taking currency risk against the US dollar. Right now the CAD doesn't have a lot of purchasing power.

If you want that US exposure now, he'd look out 5 years with a currency hedge. At some point the CAD will appreciate. And that's the similar situation with Europe.

A good idea if you can find the right investment vehicle. He's not sure if there's an ETF with hedged exposure to European banks, but there will be ones that focus on European dividend payers with hedged exposure. BMO offers some ETFs in this regard.

Consolidated after a massive run this year. For a longer-term perspective, let's look at a 5-10 year picture for the banks. He likes looking at the ZEB for this purpose. Wow, you can see that we've had a really big run.

Not sure this is a great point to enter. You'll get the dividend, so that's great. But capital appreciation from here for 3-5 years, after such a big move and at current valuations, is less than average (historically). Of course, they could keep going higher.

If you want the yield, go to ZWU. It's way cheaper (as it holds the beaten-up telcos). Utilities are more attractively priced than the banks.

He sure hopes there's more room to run. (Married 35 years ago, he gave each of his ushers a 10 oz. bar of silver as a gift, which is worth a lot more now ;)

Likes the sector, thinks it's going higher. But right now, there's an element of crossing your fingers. It's so frothy, you can get some pretty violent corrections for weeks. Wouldn't surprise him if it comes back down to the trendline. But we're still in a long-term bull market. He'd buy into that.

When a market's making new all-time highs or close to them, it doesn't suit his style to jump in and buy. Because though he thinks they're going higher, he really has no idea. He was telling people around $3500 for gold that the sector was frothy, and it kept on going.

Don't bet the farm. At the moment, have an average-sized position or a little less than average.

Inflation Indicators

Last week we heard a whisper out of the White House that Kevin Hassett may be the next Chairman of the Fed. We don't know for sure, and he certainly hasn't been vetted yet. 

You have a cooperative Chairman of the central bank. You have a Treasury Secretary who understands how commerce works. They're going to come together and manipulate the market in a midterm election year to keep a strong economy going however they can. Treasury might adjust the way funding's done. The Fed chair will be an active participant/leader in the next FOMC. We'll see how that goes.

From a market perspective, what it means to him is what is the market perception of inflation going forward? One of the best indicators out there is one that many Fed chairs have talked about. It's the 5-year, 5-year inflation swap.

The Federal Reserve economic database (FRED) is managed by the Federal Reserve Bank of St. Louis. It's on their website, and Larry's posted a link to it on today's blog. The 5-year, 5-year inflation swap is the expectation of what inflation will be over 5 years, 5 years from now. They look at market-based pricing to make this calculation.

Looking at that chart going back 5 years, you can see that long-term inflation expectations have relatively been contained. There have been periods of concern (such as Covid) when it seemed that it might be breaking out, but then it came back into the range.

Right now and recently, it's been trending down. And that's what's been supporting capital markets for the last number of months -- the thought that future inflation expectations are contained. If Hassett becomes head of the Fed, and if the indication of how they're going to fund deficits going forward is stimulative to the economy, we have to then be very concerned that longer-term inflation expectations rise and break out of this channel again. All the debt out there would really cost the US government a lot.

Scott Bessent said let's focus on the 10-year, let's make sure the cost of capital to the US taxpayer is as low as possible. They can't afford long-term inflation pressures to get an anchor. Which it would if Chairman Powell and the Federal Reserve were listening to President Trump and were cutting aggressively when the economy was running hot and didn't need it.

There's a debate going into the first half of next year. There's probably enough support for the Fed to cut in December. The worry is about their other mandate of full employment. Inflation and employment comprise the Fed's dual mandate. If you could tell him how that's going to play out in the next 6 months, he could tell you exactly what policy is going to be taken and almost exactly what capital markets are going to do. But we don't know.

If the long end of the curve comes unanchored, and we have to worry about that long-term debt funding, then that's bad for all capital markets across the board.

You can watch the 5-year, 5-year forward inflation return indicator online, and if it starts to move to the upside, anxiety levels will follow.