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

Share multiples won't do well if bonds become much more attractive? That's right. Not sure what the breaking point is. The Fed was at pains to say that it wouldn't raise rates for the longest time, letting inflation run higher. Not sure the market's completely buying in to that. In 2018, the Fed raised rates more aggressively which resulted in a downturn in the fourth quarter. They don't want a repeat. Reality is, US growth could be 6-7%. The long duration equities that have ruled the game have been predicated on 0% interest rates, and that's probably not going to be the case. Cyclical and short duration assets, such as financials, industrials, and energy, should do better in a higher growth environment.

Bank stocks have caught up. They were huge laggards. They benefit on a number of fronts, including the steepening yield curve, over-providing on loan losses, and stimulus. Sitting on excess capital. When the doors open up again, look for share buybacks and dividend increases. They're in a sweet spot right now. He's overweight financials in Canada and the US.

Semiconductor sector. A fast-moving sector with high valuations. Go with the 5G players. QCOM, which he owns, goes to the top of the list on valuation and potential growth. AMD has done exceptionally well, though valuation is a bit extreme. Not a bad way to play is through the SMH ETF. Nvidia has had the highest growth, but valuation also extreme. He wouldn't chase INTC, even though it's cheap.

Holding bonds. The 40 year bull market in bonds is over. The only way yields can go from here is up. Have some weighting in bonds, and it provides some protection and income when equities come under pressure. He'd rather go with preferred shares, and they have better tax treatment. Corporate bonds will do a bit better than government. He'd have a hard time promoting jumping into a bond investment right now.

Gold. He's underweight gold. Problem for gold is the USD. Rising US dollar is a real headwind for gold. Gold has also suffered from interest in crypto currencies. You do want to be in the sector. KL is a candidate, also Torex, Alamos, and B2Gold. Exceptional valuations. The USD will come under pressure at some point, with all the monetizing of debt.

Favourites in the oil sector? Suncor is still his favourite. Tourmaline is one of the best managed companies out there. Throw in the pipelines too. He has a 10-12% weighting in the oil sector.

Is there too much euphoria in the market right now? A mixed bag. Economic outlook very strong with people getting vaccines, economy reopening, pent-up consumer demand. Market's had a good run. Pockets (tech, in particular, and speculative areas) are showing some froth. Up to investors to pick the right securities in the right sectors. Value-based, cyclicals will benefit. Some the of high flyers from last year can take a step back.

Which economically sensitive cyclicals look most promising? A wide range. Canadian commodity companies (copper mining, steel, agriculture). What's good for commodities is good for the Canadian equity market.

Are rising bond yields spooking you at all? Something to be aware of and a little bit cautious. The most highly valued areas, such as tech, and speculative areas are most susceptible to the rising rates. Bond yields moving up sharply has made some of the high PE stocks quite vulnerable.

CAD vs. USD CAD has strengthened recently. One of the better currencies globally in 2021 against a weaker USD. Could be related to energy prices picking up or that there's a cyclical trade underway, commodity prices improving, more US investors moving assets to the Canadian market. He worries a bit longer term. US is in better shape than Canada in terms of the consumer, economic reopening, GDP outlook, debt-to-GDP levels. Unlikely CAD goes back to par. If CAD goes up to 85-86 cents, he'd consider moving some assets back to USD.

U.S. Fed Powell today said pay no attention to inflation, so the markets rallied. Powell says he'll keep rates low into 2023. But bond investors didn't believe him while new investors to markets also ignored. Ignorance is bliss in today's market--younger people who get stimulus cheques this week and will buy stocks. Who's right? Hedge fund managers think Powell is deliberately ignoring inflation and will get out of control; that's why they're selling growth stocks and buying cyclicals. Meanwhile, aluminum, steel, semis, lumber and housing keep rising. This will drive up prices for products like cars, triggering inflation. However, if the Fed wants to slow inflation, it means slowing down the whole economy and there's still a lot of unemployment.

Bond yields are rising, indicating an improving growth outlook. The pace of this increase caught markets off-guard. The 10-year yield leapt from below 1% when the year started to the current 1.6%. Inflation should pick up in coming months. Currently, inflation remains below the norm at 1.3% core inflation, but inflation is rising because so is consumer demand. Will inflation return to the 2% norm? She expects a steady recovery in earnings. Q4-2020 earnings were up 5% YOY and better than expected. Earnings on the TSX and S&P for 2021 are projected to be higher than 2019--that's a recent surprise. Profit growth is broadening to different sectors. Economies are opening up. The consumer is in good shape as household net worth are at all-time highs. This is good. She sees a rebound in spending, especially in service industries.

Canadian banks outlook Hang onto your banks, because they're catching up now after a stagnant 2020. Banks will do well when yields rise and the economy improves, which is expected this year with reopenings. We'll have to wait when government support pulls back or ends in the fall. We'll see how self-sustaining the economy will be. The banks have been prudent in their reserves, and have enjoyed fine growth in wealth management and capital markets. Despite a spike in stock prices, the banks remain below historic PE averages, though it should climb over time. Housing bubble risk with sharp rises in home prices? In Canada, we see this headline every few years. The banks' loan-to-value ratios are resilient. Also, consumers have decreased credit card spending and are taking on more mortgages given very low interest rates. Third, employment will improve in Canada and will boost household income.