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

Gold. Gold has a flight to safety type movement. However, we are seeing money flowing into digital assets. Gold, traditionally chosen for safety, is being replaced by bitcoin and other cryptos.

Educational Segment. There are signs for a melt-up bubble. The BoA has released a report saying that there are more funds flowing into the equity markets than in the last 12 years. It is phenomenal. Looking at two indicators today, the first is bull-bear ratio. The S&P 500 sentiment is becoming extreme. At these times, we see corrections of 5%-10%. We are not seeing the same degree of speculation, however. Looking at the Opportunity vs Caution indicator, it is reaching a high caution level. There is froth. Once earnings get priced in, there will be a sell in May. Need to be more defensive in portfolios in the next months. We are seeing traditional late cycle behaviour but the bubble can get bigger and bigger since the Feds will not be cooling the markets.

Euphoria? There are two camps: a short-term pullback is coming, or we're entering an exponential upsweep. There's lots of opportunities in stocks as there's little upside in bonds.

Market outlook. Currently focusing on mid and large caps in North American. Markets tend to remain constructive as long as central banks are. You have a receding pandemic in the US and trillions of dollars of fiscal spending that goes directly into the economy. What works may change due to the stimulus. This would be value stocks rather than techs. As a bull market continues, you get a rotation into quality value with good balance sheets.

In 2007, there were a few mortgage funds that went broke. They were canaries in the coal mine. The recent hedge fund blowups are similar. Too much leverage in the system and not enough liquidity. Must be mindful that leverage is returning to the markets.

Bond yields. They could go either way in the year ahead. Big question is do we see a test of 2%? A real chance that we could see higher rates, and then the market has to start paying attention. If the 10-year gets to 2%, it gets interesting. A game of chicken. Does the Fed do curve control, which pins down the rates in the yield curve and causes a lot of distortion? But we're not there yet. Probably 9-12 months before the Fed starts to talk about tapering or lifting rates.

Investment grade or high yield bonds? For the last year, he's focused on credit spread. There's been very little value. He's buying mostly short-term, under 3-4 years, and focusing on government yield curve. Risk that rates drop from these heights and a chance we run into a recession. He's neutral in his spot, and negative on credit. Not a great entry point for a great yield experience.

REITs. He really likes industrial and multi-apartments. Those are the best and safest rates of return. He's avoiding office and retail, even though they're trading at significant discounts.

Preferred shares. For preferreds, assuming they're resets, it's more about the state of the interest rate market. If we think rates are going up, preferreds will do better. You have to make a call that the BoC and the Fed will raise rates sooner rather than later. You know they won't raise rates for the next 9 months, but it could go as long as 2-3 years. Or rates could drop.

Are people too euphoric? No. Markets are full of optimism. Though there will be bumps along the road, we continue to make new highs as worldwide vaccine progress continues. US stimulus plans should bridge economies until we reach herd immunity. The IMF has boosted world growth GDP for the second time in 3 months, the strongest annual GDP expansion since 1980. Safe to favour equities over bonds, cyclicals over defensives, and corporate bonds over government ones. Commodity prices should continue to gain traction.

Inflation. One of the risks to consider. We might see 2% inflation, but not excessive. Bond yields have calmed down. Another bump in the road would be if the Covid variants get out of hand. Rapid vaccine rollout in US and parts of Europe will help the reopening trade and cyclical stocks. Though we're not feeling it here in Canada yet.

Canada or US now? Has been overweight US for many years. Now it's time to look at Canada and internationally, including Asia and Europe. In Europe, it's value and financial stocks. You can't beat the depth and breadth of the companies in the US, but now's the time to look beyond.

Which US bank to buy? US banks are great, one of the top performing industries in the S&P. Focus on valuation, trading below or near book value like WFC, Citi, and CFG.