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

A wild day today when the market flirted with a correction. Confusing times. But be positive and constructive. It's painful while it lasts, but he doesn't see signs of an end to the bull market. In 10% corrections since 1928, 60% of them didn't fall further. On average the third year of a US presidential term sees 16% returns, 21% if Republican. A recessionary indicator he saws says there's 0% chance of recession. Since 1978, the average return the year following a correction is 18.5%. That said, we don't know how the trade war (US-China) will resolve. That fear of a trade war triggered today's selling. He thinks the selling is largelty algorithm-driven, perhaps 66% according to one study. Look for sound businesses trading at reasonable valuations as earnings grow year over year. He still
sees earnings growth in 2019. The TSX has a lower/better valuation than America's, but Canadian relies on energy which will remain slumped. He favours the U.S. market.

Where are the FAANGs and S&P going? Two of the FANGs are highly valued while the others are reasonable. The higher ones are falling faster. He invests fundamentally for the long run. A rally could start tomorrow or the day after the Midterms or six weeks from now. He's comfortable with the fundamentals in the economy, pending a black swan event.

He's not quite ready to buy this correction. The volatility still bothers him. We're -9% YTD in the TSX. Remember in June 2008 the TSX was at 15,200. So, we're net flat since then. It has paid off to invest in the U.S. He wants to see three or four days of calm before stepping back in. We will rebound from this correction, which feels terrible when you're in it. Things do look cheap, but wait a little. If you have dollars, maybe buy a third now, then another third closer to Christmas. The fundamentals remain good.

Outlook for Canadian banks? Canadian banks will benefit from higher interest rates. They have pulled back below their average long-term multiple. Historically, they manage their loan books well when rates rise higher. Mortgage growth is slowing, but there won't be a mortgage distaster. The banks will likely raise dividends. You can buy them now.

Why does the TSX follow the American markets in this US-China trade war? A complicated answer. We sell according to world prices. With more tariffs from the US and China, it'll probably hurt China more, so that'll dampen their demand for resources like oil and gas. If steel and aluminum tariffs are rescinded (it could happen), that will benefit Canada. Remember, 70% of our trade is with the U.S., so what happens with the U.S. effects us.

In this market sell-off, base metals are selling off even harder though energy stocks (small caps) are holding better today. Again this year, Canadian small caps have underperformed the large caps. Note that the Canadian and US markets over 20 years actually have evenly performed, offereing the same return. The last 10 years have been a lost decade for Canada, but the decade before that was a lost one for America. He believes in reversion to the mean, like seeing tech stocks coming off lately. Canada has underperformed emerging markets the last few years, but that could change with stable oil prices.

The expert on today's show reported only 2 Top Picks.

Octobers do this--downtowns. U.S. markets needed to come off. It's healthy. The yield curve is still fine, and there's nothing to signal this will be a really deep bear. We're still in a bull market, so at some point you need to buy. You should be selling defensives like utilities because of rising rates. The tech stocks, like Google, are still a buy. He's shifting stocks. He raised more cash lately and holds 14% cash. Cash is important now. He doesn't think the FANGs (including Facebook and Google) are expensive.

Momentum stock to buy? Google, Amazon. Among Canadian dividends, pick away at Intact or Stantec. No shortage here. If you can take risk, look at oversold stocks in Canadian oil, like Baytex. Also Bombardier. These are way oversold.

Worth buying GICs within a portfolio? If you can get a 4% GIC for 5 years, that's great. He can't think of a 4% GIC, but even 3.2% or 3.5% is fine. You need fixed income in your portfolio to act as a shock absorber in downturns like this.

How do you know that a dividend will be sustainble? Look at the payout ratio. Is it a percentage of EPS or free cash flow? Which matters more for the stock? Also look at the top line--what is the top line estimated with pretty good visibility to be growing at. What is the trajectory of say the payout ratio, creeping up? If so, not good. Or going up?

What are the pros and cons of preferred shares? They trade like very very long bond and are interest rate-sensitive. Pro: Inflation protection. Rate resets preferreds mature in 4 years that the company can extend for another 5 years. Consider, What is that reset spread? How competitive is it? These are perpetual; a company can keep them going forever. Make sure they are generous to investor terms. He owns a lot of these for clients. They are fixed income proxies and inflation adjusted for interest rates. They pay dividends and are eligible for the dividend tax credit.

Defensive vs. growth stocks? Defense has done well lately. He still likes AQN-T and Fortis, though he trimmed the latter. Why? If the market corrects further, then Fortis' price won't hold. But these stocks will be pressured by higher interest rates. This correction won't last forever. Essentially, he's trimmed the best names and reinvested in the laggards. If interest rates continue to rise, then go with growth.

Market. The Fed has been the backstop for the market going down. Now they are raising rates unless something else comes along or goes wrong. We saw the peak in September in the S&P as well as the TSX and then we had a correction take place so that we were down for the year. If we can hold above the lows of earlier in the year, then we will be okay otherwise we are in for a bit of trouble. The TSX is at 2014 levels now. Just because the index is lower and underperformed the S&P does not mean it will outperform the S&P. He manages HAC-T (Seasonal rotation ETF) and it has outperformed the TSX. He still has a fairly large chunk of cash. We are coming up to that 6 month period where the market tends to perform well.

Canadian Banks. Rising rates are good but at a certain point in the growth cycle, near the end, loan growth slows. That is what it taking place now. Canadian banks have not benefitted that much given rate increases. Seasonally they should be strong from August until December. As the interest rate stabilizes, it is something he could go back into.