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

Is the US-Iran war carries on, then gas and oil prices will remain high and translate into inflation. We already see higher prices at the gas pumps. US unemployment remains low at 4.3%, but employment growth is slowing, while unemployment in Canada is high. This all puts central banks in a tough spot; in Canada, rate cutting is done, but not in the US before the Iran war erupted. Central banks are waiting and seeing, but if inflation continues to climb, then central banks may be forced to raise interest rates. Slow growth and high rates could lead to stagflation which is not good. Manufacturing in the US has been expanding while services has been healthy, though. Earnings growth is coming through, largely driven by technology. Growth is projected at 23% this year and 15% in 2027. Analysts are not projecting a significant slowdown. The AI data centre build is a long-term secular growth theme, but the lack of power would slow that build. A pullback in that build is possible. 

Most companies have reported Q1 earnings at this stage. For the most part, earnings have been quite resilient despite the situation in the Middle East.

In US markets, most of the recovery has gone to AI-adjacent companies. A lot of consumer and industrial stocks remain fairly sluggish, especially for the low-end consumer.

It seems as though the market's expecting that big tech will continue to spend on AI, regardless of what returns they're earning on this capital. That's what's powering the strong performance of companies that supply the data centres. All that while the share prices of big tech companies themselves haven't been going up as much.

Canadian stock market is much more commodity-driven. Given what's happening in the Middle East, investors have largely forgotten about the upcoming renegotiations (even though that will be a much more consequential event for Canadian equities and the Canadian economy).

Overall, he expects quite a bit of volatility as parties position themselves. Ultimately there will be a successful renegotiation, as both countries need what each other is offering.

Because of what's going on in the Middle East, the US may want a more secure supply of natural resources of the kind that Canada has (sulpher, rare earths, oil). The focus for Mexico will be more along the lines of auto jobs and onshoring. So the details between Canada and Mexico will differ substantially.

Markets see right through the high oil prices and the US-Iran war and see only great earnings and nothing else. For the population that lives paycheque to paycheque, the oil price makes things worse while the other half are okay. Unfortunately, that's the state of the world. This should result in market volatility because the high oil price will matter. Also, if this happens long enough, wages will rise top keep up with higher prices. Things will get way worse before they get better. Also, US government debt is astronomical.

Inflation expectations for 30-year yield bonds: take the nominal and real return bonds and subtract the yield to arrive at the expecattion priced into the 30-year yield. Long term yields haven't been higher in more than 2 decades. Tariffs and geopolitical risks are fueling inflation. This is terrible because the US has $39 trillion in outstanding debt. T-bills are now at 3.3% and projected to keep rising. Trump wants to lower rates, but this will increase inflation expectations. If T-bills trend higher, then the cost of debt to GDP will become unmanageable. How well will the White House, treasury secretary and not Fed chief cooperate in the coming quarters.

He has taken some $$ off the table in energy (SU is a good example), and sporadically in other areas.

Everybody exited software, which is under pressure from AI. Then they went into oil, and subsequently trimmed it. The cyclical category of defense has also moved up as a conflict beneficiary. The narrative seems to be that, at some point, the US president will end the Iran conflict. Then we'd see energy retrace. 

It's been a great way for governments to harvest taxes off people, because when you move from winners to winners you have to pay taxes all the way through. This'll be a big year for everybody paying taxes come March 2027. It's an unappreciated risk that people need to think about.

President's approval ratings have fallen below 30%. This reflects higher energy prices, and perhaps a tougher job market.

The president doesn't want to become a lame duck. If he loses control of the Senate or the House, he'd have to default to executive orders (which can be replaced as soon as he leaves office). So he's going to do whatever he can.

Monetary policy is not a lever he has control of. We've seen expansionary fiscal spending, and conflicts are inflationary. That spending makes its way into the economy, and that's why markets are at very high levels.

He'll do that for sure. But when you have at least the illusion of independence from the Fed, he'll have less ability to get done what he wants. Ultimately his big lever is fiscal, and he doesn't really need to heed the Fed.

If there was a significant escalation, he might consider allocating to energy as a trade. But his firm deals in outlooks of 3-5 years.

You want to take your dry powder that you reaped from taking profits and invest it in segments of the economy that have been depressed. Software looks interesting. As does healthcare and medical technology. From a global perspective, luxury looks very inexpensive.

Some portions of the industrial market are worth a look, particularly companies that use IT resources.

A cyclical category has wild swings. A catalyst can drive the price up. Do you want to invest at the top of the cycle? No. You make money when you buy, so buy at the bottom of the cycle and hold till the top. If you miss the cycle, wait for the next one.

Pay attention to the semiconductor capital equipment companies, as they lead semiconductors by about 6 months. When the first category starts trending down/up, you know that the rest will soon follow.

For the last few years, as we've seen significant money printing through quantitative easing or fiscal spending, debt has favoured growth. Looking back to 2008-2009, growth came out of the market and the market collapsed significantly. The value market significantly outperformed. 

Value names are very inexpensive now, so you could add them as ballast to your portfolio. You could buy staples now, and you'd be increasing the amount of income coming into your portfolio. Think PG, CL, UL, BN.

When tech crashes, you do the same thing. What you're doing is moving capital from expensive names to inexpensive. This builds a portfolio of sustainable wealth. If you get the timing right, you can avoid major drawdowns but still get fairly consistent growth.

His team are not really value investors, but more GARP (growth at a reasonable price) investors.

A lot of it, but not all, is definitely stemming from earnings. We're in the throes of a barn-burner of an earnings season. There's good fundamental support for higher share prices.

But there's another side. There's renewed interest in all things AI, and that's really driven the recovery from the selloff in hyperscalers. The elephant in the room is hopes for peace in the Middle East. Markets are clamouring for that to be a done deal and have priced in a resolution.

Almost certainly the prices of oil and liquified natural gas will settle in a range above where they started. But there's wild volatility. Yesterday, between his going to work and coming home, the price of gas near his house dropped 12 cents a litre. The price of energy is also implicit in the price of all manufactured goods.

A certain amount of destruction has occurred in the Middle East region that's not just going to come back online overnight. Estimates are in the range of 3-5 years for some facilities. There's a long tail to this war in terms of supply chains.