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

Market Update:
The Canadian economy gained more jobs than expected in September as the unemployment rate stayed unchanged at 7.1%, raising questions about the timing of the next rate cut. In addition, the Prime Minister Mark Carney brushed off calls to retaliate against the U.S. over tariffs on some Canadian exports, saying the two were in talks to figure things out. The Canadian dollar was 71.20 cents USD. The U.S. S&P 500 ended the week up 0.5%, while the TSX was down 0.7%.

It was a mixed week of greens and reds. Consumer staples rose 3.3%, while consumer discretionary and materials gained 1.5% and 1.2%, respectively. Industrials edged up by 0.1%. On the other hand, energy slid by 5.6%, while technology and financials gave up 1.1%, each. Real estate ended the week down slightly, 0.2%. 
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TSX is largely gold, so that's what's driving the bus. It's the only sector outperforming the index this year, and it's outperforming by so much that it's raised the average of everything else.

Under the surface, the infrastructure stocks they own are doing pretty well. So he's happy with where things stand.

We're in some sort of changing of the world order. US government taking positions in private companies. Ongoing trade war which escalates and de-escalates day by day. A lot of that is filtering into gold. His firm is a bystander in  this. They own a bit, but not a lot. 

He's been watching the dichotomy between gold and Bitcoin. Bitcoin is supposed to be digital gold and better because it's portable and costs less to store. But it's not performing the same way gold is. That tells him that adoption isn't there yet. As well, when the person on the street is chatting about gold, that's a warning sign of bubble-like behaviour.

The changes we're seeing in the US treasury market and in many countries makes it hard to tell exactly how assets should be valued. Assets are valued relative to each other. A year ago, gold was clearly undervalued relative to other assets, and now that's changed.

You can make logical arguments both that there's room to run higher, as well as that we're overheated here and due for a pullback.

Some investors like the entertainment and streaming segments, but his firm doesn't find those areas durable enough for their clients. That world just moves too fast for them.

Just this morning, he had a discussion with a client who's retiring at the end of this year. She's 58 and has worked for the same company for 30 years. It's not as though she's retiring with a massive portfolio, but it's enough for her to live off of. This portfolio has to take her to, say, 98 years old. That's 40 years. She needs something that's very durable and will last that length of time. Produce income for her to spend, protect the downside, and provide some upside if there are worries about inflation or currency debasement.

Interestingly, whole Canadian energy space has been pretty resilient. Gradually people are returning to Canada on the basis of our lower decline rates, better prospects for transporting oil out of the country, and a government that might support further investment. Good case to be made that oil prices could rally from here. 

In 2026, you'll really want to watch drilling plans for US shale drillers. If they're not drilling, that could set the stage for a pretty good environment in Canada.

He's underweight, and has been for some time. His portfolio position on banks is ~15%, compared to 20-25% of the index. It's not a market-timing call, but more of a long-term structural call. Better places to put $$. For individual clients, he doesn't mind selling some bank stocks to fund expenses. Otherwise, he's happy to hold and collect the dividends. 

All of them are quite rich, he's not buying right now. And we're still not at peak reset for Canadian home mortgages, which will be end of this year and into next. He'll be watching that.

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It's been the same themes all year long. If you look at the core sector leadership groups, it's been financials, industrials, and materials really driving the bus. Materials have been exceedingly strong.

There's been continued hedging in portfolios against inflation. Inflation is sticky. While the Fed is now cutting rates, it probably increases the longer-run chances for inflation. You can see that in the long-term treasury bonds.

The TSX is benefiting because the sector makeup in our market is a more inflation-oriented index.

The problem with market-cap-weighted indices is that they can become exceedingly overweight certain sectors. 

So if you look at the S&P, it's underperforming almost all global markets YTD. It's a very growthy index, and some of the sectors that are really working are very small pieces of the S&P. For instance, materials make up ~3%. Whereas in the TSX, the materials sector is a much larger piece (in the teens). 

In a market right now that's uncorrelated, it means that there are haves and have-nots. For active portfolio managers, it means there's an opportunity to add value.

From 2007-2024, the all-world index (ex-US) had almost no return. Whether you were looking at Europe, South America, or Asia. Japan had 33 years of no return.

But in the last 18 months, international equities are outperforming the US. Part of that has to do with ~31-32% of the all-world index being financials, and financials have been very steady. Materials is a much larger piece of the global index. There are also a lot of great industrial companies. 

International investors wound up very focused in the US because it was the only game in town. But now their markets and their currencies are doing a little better, and so we're seeing capital rotate back to international stocks.

Inflation is stickier than the market is picking up on. Things that do well in an inflation-oriented environment are what's leading the market. US jobs date is weakening. If you're a consumer who has assets, the world we're living in right now is great. If you're a consumer living month-to-month on your wages, life is getting more expensive, and wages aren't keeping up.

When he looks at the consumer sector, the breadth of the advance (stocks performing well) of stocks in that sector has been steadily weakening. Tells you that that risk/reward in that group is not in your favour.

Lots of cross-currents in the energy market. President south of the border encouraging "drill, drill, drill", which will likely add to supply. Some pressure may be coming off geopolitically. Price of oil is moving a bit lower. We're coming out of the seasonally weakest time of the year.

Large-cap energy companies have traded better than you'd expect, given where oil is. The big names have been outperforming. The big Canadian oil companies are very different from those in the US, which are producing shale oil. Our reserve life should be worth a lot more.

We've started to see it. In the earlier data we saw some pull forward of demand for different products. The Canadian numbers for August were pretty staggering in terms of the trade deficit. So we're starting to really see the impact and the bite of tariffs.

Everybody's sitting on pins and needles, there's just so much geopolitical tension right now. And that's what's captured everybody's attention -- how long will it last, and how will it play out over the long run?

The flipside to what's going on geopolitically is what's going on in the technology sector in terms of chip demand and the buildout for AI. There's a massive land grab going on right now, and it's massively expensive.

Different parts of the market are pushing higher. The way that the indexes are composed means that some of these larger companies are getting more and more fund flows. There are always nuances to the market overall, but this is more of a continuation where just a few names continue to drive the market.