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

We've seen a good flurry of earnings out of the US -- about 20% of S&P 500 companies. Notably, we've seen the big money-centre banks, some of the regional banks, and some tech names (though we're waiting for most of the Mag 7 reporting next week).

Early indications from US banks are that things are looking good. Same for other sectors like consumer and industrial names. Just starting to get a trickle of results from Canadian companies. Expectations are high.

It looks pretty good going into year-end.

This is a really important budget (though we always say that). But this particular budget is one where the Canadian government really needs to meet the moment.

Seeing estimates from private-sector economists that are bracing investors to steel themselves for pretty big budget deficits, something in the order of $80-100B. These are levels of deficit we've really not seen outside of those couple of years of Covid.

He'll want to see some indication that the government is realizing efficiencies in the day-to-day business of running the government. There are ambitious plans to make commitments to fund the military and to support NATO. He's hopeful that we're going to see incentives to encourage private-sector investment, which is something Canada desperately needs to enhance our prosperity.

If we have an ambitious and well-thought-out budget, it could alleviate some of the pressure on the BOC to cut rates more aggressively. May shore up some support for the CAD as well; it's up YTD, but lagging all of its G10 peers against the USD.

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Markets are looking forward to the outcome. But we're seeing tensions elevating with US, China, and now Russia, and that will increase the volatility. Historically, the gold bugs like to see a little bit of chaos and global instability. That's what's partially driven the gold price to a record high earlier this week. Anytime you see moves like this in the market, it's normal to see a reversal later on.

If you're in the gold trade, nothing has fundamentally changed to derail that upward trend.

Does expect the year to end strongly. Political instability aside, we're seeing a lot of positives. There's a very strong monetary backdrop with interest rates coming down and inflation seemingly moderating. Also seeing fiscal expansion across many Western governments such as tax cuts in the US. In Canada, a record deficit is expected -- not always great over the long term, but in the short term that liquidity flows into the economy. 

Historically, when we see a strong first 3 quarters of the year it portends well for the fourth quarter (which is easily the strongest in any average year).

Those are the companies that are leading this market higher, and his team still sees it moving up. From the data centre side, we're hearing that leasing activity is accelerating. Some of the new models coming out continue to use more computes, which requires more chips and more data centres. Doesn't see anything derailing that over the next 3-6 months.

It's all about seeing the AI benefits eventually flow through to the corporate sector. We're hearing more and more positive data points on that every day. As adoption becomes a little more widespread, that's a whole new leg up for this trade.

It is always a concern. If there was going to be a repeat of the 2000 bubble, the data centre part is where you'd see that and then in semiconductors and right through the economy. 

But he's most focused on the use-case return on investment, and we're seeing that right across the spectrum. For example, BP credits its large oil discovery off the coast of Brazil to AI's helping them better target exploration. Shows how AI can have positive consequences for companies, and we're going to continue to see adoption increase over the next few years.

It's had a really big move. Now back to where it was at the beginning of the month. It felt good on the way up, but it's not quite as much fun on the way down. Volatility of gold has really picked up, so not surprising at this level to see these bigger movements. We need the volatility of gold to slow down a bit so we can determine where things are at. 

On the longer-term technicals of gold, this recent move barely shows up. That said, changes in the short term always lead to changes in the long term. In the last little bit, gold has gone parabolic and, with that, people piled in. Just took a little bit of downside momentum for people to want to lock in profits.

With the shutdown in the US, we haven't seen data on the commodities and futures exchanges to see what's going on with producers versus speculators of gold. Once that data gets updated, it'll be interesting to see the flow of funds.

He watches a number of technical indicators that provide a bit of warning that momentum or liquidity is starting to come out of the market. These indicators also chart the overall trend. So far, not seeing anything concerning. Trend appears to be intact.

We haven't really had much of a pullback. A pullback of 5% at a time doesn't really show up on these indicators. But something to always be prepared for and take advantage of it when it happens.

So, given that the indicators are still positive, he'd be looking to add on any pullback in any specific areas. 

His shop covers about 2600 companies in NA, and they rank them every day. The top is still dominated by gold stocks. Even though the price of gold fluctuates, the trend is still up. So gold companies can sell at the current price, though their costs haven't gone up (and may actually have gone down). Which means that their profitability continues to be really strong.

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It's a bit of a problem in terms of messaging. They know what they want to do, and this is a bit of a headwind in terms of the message. He thinks they would like to cut rates. Some of the officials have been quoted as saying that it depends on which inflation measures you look at and, as we know, there are a few ways to look at it.

He thinks they're more worried, as they are in the US, about the health of the economy (and making sure it doesn't roll over) than they are about inflation. They're ready to accept that inflation might be just a touch stickier than it would be in a perfect world. It might take them over that 2% mark, which is largely an artificial baseline, but they're willing to live with that.

His team doesn't see the constituents of the classic bubble. You can't deny that the markets have moved forward. To most people that's a good thing. But of course it brings with it some risk, and then some people start to apply that "bubble" label.

In 1996, Alan Greenspan (Fed chair at the time) famously talked about "irrational exuberance". When Gordon looks at the market today, he'd label it as "rational exuberance". Exuberance is a bit scary for markets, as we like them to be discerning and analytical. 

But markets are like a lot of things -- if enthusiasm builds, the focus moves away from the company and toward the stock price, causing people to become momentum investors. We've seen a bit of that, but we've also seen very strong corporate earnings. The leadership is fulfilling the third leg of the so-called "economic revolution" -- from industrial, to technology, and now to early stages of AI.

Absolutely. It shows up in the returns that they're gaining off their investments, and those investments are mammoth. This year, the hyperscalers will invest close to half a trillion dollars in data centre development to create the capacity for what we're told will change our lives. And we're already seeing some of those changes.

Bottom line is they're making money. GOOG, for example, is trading at about a 3.5% discount to the valuation of the market as a whole, even though its growth rate is a number of times greater than the average company. Some of these companies have stretched valuations, but not all of them.