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

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. 

Everyone's watching economic data very closely as we approach year end. Canada almost ran into a recession in the last 2 quarters. A technical recession is 2 negative quarters of negative GDP growth, and last quarter we did just beat that.

Are we starting to turn around from a Canadian perspective? Time will tell. We never really know we're in a recession until later on down the road. BOC has done a good job diverging from the US and making those cuts that our country needed. Those cuts helped us to potentially avoid a recession in Canada.

Growth overall has cooled and inflation's easing. Sentiment swings with every data release. Even though investors are shifting from positive outcomes to preparing for a range of scenarios, we're looking at consumer spending heading into Black Friday, Cyber Monday, and the holidays. Spending is remaining steady, but people are looking for those discounts and pivoting their spending habits.

She'll be watching spending closely.

Earnings from companies have remained resilient, and we've seen policy support. Overall, her team is remaining cautiously optimistic about the road ahead. In the US, attention is really moving from interest rates to what matters for 2026 and how that positioning works.

Quality and durability of earnings is still strong and really carrying the markets solely right now. A big part of the conversation is the growing scrutiny around revenue circularity, especially in AI. This discipline is healthy.

Both from an economic and profitability standpoint, she'll be watching customer expansion, diversified revenue, and improving margins.

From strictly a valuation standpoint starting to see a bit of pickup in the healthcare sector, especially on PE ratios from where they were at the beginning to middle of the year.

Expects materials to still be strong through the end of 2025 and into 2026. Especially for gold, silver, precious metals.

Doesn't see AI going anywhere. There was some selloff in some of the bigger names such as MSFT and META. Thinks momentum will still carry.

Her team's looking at the path forward for Canada, US, and internationally. The rate cut cycle is still continuing, which provides positive momentum for equity markets. Still lots of cash on the sidelines that will be coming back into the market at some point. The Fear/Greed Index is still more on the Extreme Fear side, so that tells her that investors are a little cautious right now. Could be a great buying opportunity.

Heading into the new year, her portfolio positioning remains consistent. Maintaining a neutral equity allocation, avoiding the zombie companies that are stagnant. Lean on quality. Any volatility you see and are expecting is an opportunity to high-grade your holdings in a position -- take profits, perhaps cut losers, and rotate into good-quality companies with strong profitability.

We have a good couple of years ahead. She's optimistic heading into 2026.

It's really sector-specific. 

Energy, for example, tends to be a lot more volatile than, say, consumer staples. Energy is very tightly meshed with oil prices. So if oil prices fluctuate, you'll likely see a lot of these energy companies move too. She wouldn't be surprised to see even a 10% pullback in energy with normal volatility. And a 10-15% pullback in some of the large-cap names would be a big opportunity for investors.

We've had quite a bit of muted volatility. She wouldn't be surprised to see a bit of a short-term selloff at the end of the year or heading into January 2026. It'll be normal and healthy for the market to take a breather.

Economic data and buildup from the US government shutdown should show data a bit weaker than expected. That will affect positioning for 2026. After a sharp V-shaped recovery such as we saw in April, historically 2 years later the markets are bullish. So she believes that 2026 will be strong.

Seeing jitteriness on the US markets. Whether the TSX or the S&P, you see this nice, smooth upward trajectory on the charts. We have a breakout to all-time highs on the TSX. Then around the beginning of October, we've had a lot of volatility and not much progress.

What we're seeing is some brittle behaviour with respect to what's going on in the AI world. Investors are wondering if the AI capex will be rewarded. The capex is real, with $350B spent this year. Global AI spend is $1.5T by year end. So it's not hype, it's real money. But what we have is 1.5B users engaging with consumer tools around AI, but only 3% are paying for the premium services. That's the gap between adoption (which is explosive) and monetization (which is lagging). That's driving the week-to-week volatility.

We really don't know, but he thinks the concern is unnecessary. It could take time for this to roll out. We had 81% of the S&P companies beat earnings expectations. So the tech-led beat is real. It's not the eventual effect of AI that's uncertain, but the timeline in which it will manifest.

Some parts of the market are showing "bubblicious" action. PLTR, for example, is a pretty expensive stock with lots of high hopes. But at the same time, you have Warren Buffett taking a position in GOOG. 

So this is not a bubble by normal standards. Looking back to the tech bubble, it was up 800% by the time the bubble popped. Today we're up 100%. Not a bubble today, but we're working through a natural progression where it's a bit uncertain as to what the adoption's going to be.

Plus, we've talked in the past about the J-curve of resource production to build the AI centres and the power generation required. This is also adding uncertainty.

Stocks are discounting mechanisms. They're trying to discount the future of pretty massive growth -- very small changes to that will have larger impacts today.

Make sure you stick with quality growth companies that have some pricing power. You want commodity and natural resource exposure to get to the picks and shovels that will go into this AI buildout and grid expansion.

For the uncertainty, make sure you have some gold and some high-quality bonds in your portfolio.

Canada is really well-positioned here. Huge cross-border flows coming into Canada, in both bonds and stocks. The TSX and the TSX mid-caps (XMD is the ticker) are doing really well because of industrials, energy, and materials. Those areas will all have an impact in the rollout of AI. So there are places to go.