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

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COMMENT
Remarkable rally due for a pullback.

Correct, as we've seen such an extended rally. Valuations are very high, especially in US stocks. People seem to be ignoring potential risks such as tariffs, and rhetoric has accelerated in the last week or so. If you look from January 1 to today, you have more geopolitical risk, earnings estimates coming down, US market continuing to rally. He's a little more positive on Canada.

Investors are being complacent right now, and it's time to be a little bit cautious.

COMMENT
Rising stocks and rising bond yields are not compatible.

The bond market's really telling us it's concerned about inflation, the US deficit, and tariffs potentially being inflationary. With today's additional tariff rhetoric we've seen bond yields moving up. That's a clear sign that the bond market has one view, and people often find that the bond market is a better gauge than the equity market of what's going on from a macro standpoint. 

Equity market's being driven by momentum, retail investors, a lot of hype around AI. AI will definitely be important, but we don't know how profitable companies are going to be from this massive capex investment. A lot of positive news is already built in, and the market's focusing on that and pushing all the negatives aside.

COMMENT
Sector exposure.

He doesn't typically tend to have a ton of commodities exposure. He owns a bit of gold and a bit of energy, but overall his firm is not a heavy commodity investor. It is the time for defensive businesses with good cashflow generation, and value investing should have a bit of a comeback. He favours Canada over the US right now for equities.

COMMENT
Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research

Market Update:

President Trump imposed 25% tariffs on goods from Japan and South Korea, starting on August 1. In addition, the copper market is currently in turmoil as President Trump announced a higher-than-expected 50% tariff on copper imports. The Canadian dollar was 73.04 cents USD. The U.S. S&P 500 ended the week up 0.4%, while the TSX was slightly down 0.1%.

A lot more greens this week than reds. Consumer discretionary and industrials gained 1.8% and 1.7%, respectively. Real estate and consumer staples added 1.5%, each, while energy edged up by 0.7%. Financials ended the week up 0.4%. Technology and materials ended the week down 1.7% and 1.6%, respectively. The most heavily traded shares by volume were TC Energy (TRP), Toronto-Dominion Bank (TD) and National Bank of Canada (NA).
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COMMENT
Tariffs.

There are all sorts of strategies in the stock market, including being a moth that just wants to go to the flame. His firm's strategy is to not be the bullseye. Their idea is to find a great business that everyone's ignoring, and so to find things that are not going to be affected by tariffs. Focusing on the tariffs themselves is just too hard to figure out.

When Trump was elected in November he was already talking about tariffs, so they went through all their companies to see how they'd be affected by tariffs. So far, the one impacted the most is CP Rail. They own it for the long term, can't be replicated, monopoly. It has been hit, but has moved mostly sideways. Looking at the stock action over the last couple of days, it looks as though tariffs are all priced in and the market's looking through that.

A lot of things aren't affected by tariffs. The overall economy might get softer and it looks as though it is, and the consumer might be affected. Will auto manufacturers be affected? Yes, 100%. But they don't affect the earnings from MSFT. In Canada, earnings for a BN would be affected by interest rates and the 10-year bond yield. And the budget is way more important to the 10-year bond yield and how that affects the stock market. Those things are more important than tariffs.

That's why the market has digested tariffs so quickly. They have a specific impact on this little part of the stock market, but not the big picture.

COMMENT
Focus.

Over the past year or so, his firm has really been trying to find higher dividend-paying stocks. Resource stocks are where he's finding opportunity right now, while his colleague is specializing in growth names. They're trying to build a high-income engine within their long-term strategy.

COMMENT
Market overheated?

Off that April bottom, we've seen probably one of the most dramatic V-bottoms in history. That's telling you that things are starting to get a bit extended. If you look at the CNN Fear & Greed Index, or the NAAIM exposure of almost 100% invested right now, you can see that short-term things are extended.

Markets made a really big push to highs. Now zoom out and look at the longer term, some things have happened that indicate we're setting up for higher markets long term. But there could be chop in the short term. Depends on what type of investor you are. If you're more for the short term, you might want to look at raising some cash. If you're in it for the long haul, you'll probably just sit here and ride out the volatility.

COMMENT
Is this July typical?

Going back in history for almost any market, the July numbers are usually second- or third-best depending on which index you look at. So the market having positive returns so far in July makes sense.

COMMENT
What to watch for.

There's so much going on right now, and we've seen a year like no other as far as geopolitical news and tariff talks. Now the focus will probably turn to earnings for Q2. After Q1, a lot of companies didn't provide much for guidance because of the tariffs. So now we'll want to see what the guidance is going forward, and that will let us get a better sense of valuation on the market.

Looking at the market from a historical, rearview perspective, it certainly is expensive right now.

COMMENT
What type of investor are you?

One factor is the timeframe for how long you want to stay invested. You need realistic timeframes, because we saw this past March what volatility can do to markets. He tends to focus on a lot of small- to mid-cap companies, and they can be really volatile both on their stock and on their underlying business.

Know yourself and how you react to making money and to losing money. When a stock's losing money do you follow it down, buy more, or stop yourself out? Need to know that ahead of time so that you don't get emotional in the moment. When you're making money, will you hold and make a lot of money for the duration or will you harvest your gains along the way and reinvest somewhere else?

It's important to know ahead of time what you're going to do, especially with the small- and mid-caps.

COMMENT
Risk.

When you talk to people ahead of time, most say either they can handle volatility or they don't want any volatility. If an investor doesn't want any volatility, then really the market's not the right place for them. 

If they say they can handle volatility, it comes down to how much they can handle and over what timeframe. If you look back to what happened in March/April, and now we're right back to where we were, know that it doesn't always work out that way. There have been times in history when a downturn can last for a much longer period. Think back to 2008 or 2001-2003. So investors have to understand how much downside volatility they can stomach.

If you can handle a 15-20% drop, but only for a year, then perhaps the market isn't the place for all of your money. If you can stick it out for 3-4 years, then the market is OK for you.

Also, if you have a steady cashflow and you're adding money to your portfolio all the time, you want cheaper prices. That will really help you in the long run over time.

COMMENT
Canadian banks.

Numbers for Canadian financials are starting to accelerate. Canadian banks over-provisioned for loan losses; if they don't have to tap into those reserves, should see really strong numbers going forward. On technicals, all the Canadian banks are moving up the ranks. Over 10-20 years, there hasn't been a better investment. They all pay a dividend, though not fantastic growth every single year, a bit lumpy.

They've all done well, and TD has caught up to the others, so it wouldn't make sense to switch out of one for another at this point.

The best sleep at night you can have.

COMMENT
Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research

Market Update:

Canada factory Purchasing Manager’s Index (PMI)declined to 45.6 from 46.1 in May, marking the fifth straight month sub-50 continues, as the trade war with the U.S drove the continued downturn. On the other hand, the US trade deficit widened by 18.7% to $71.5 billion in May, driven by weak exports, while economists warned that it could take some time for the tariff-related effect to affect the economic data. The Canadian dollar was 73.62 cents USD. The U.S. S&P 500 ended the week up 2.1%, while the TSX was up 1.7%.

A lot more greens this week than reds. Consumer discretionary and industrials gained 4.4% and 2.4%, respectively. Technology and financials added 2.2%, each, while real estate edged up by 1.9%. Materials gained 1.5%, while Energy ended the week up 0.4%. Consumer staples ended the week down slightly, 0.1%. The most heavily traded shares by volume were TC Energy (TRP), Toronto-Dominion Bank (TD) and National Bank of Canada (NA).
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COMMENT

Typically, people go on holiday in August; seasonality is poor in August; and September is the weakest month of the year. Indices have been making record highs and sentiment is tilting to bullish, so he's starting to get cautious. Doesn't know why September is the worst, but it's the only month with a negative return. At the start of this year, he was cautious, sensing that we're near the end of the economic cycle that began in Oct. 2022. Every 3-5 years there's a big 15-20% correction (usually 5-7% corrections), but the correction between Feb.-Apr. was quick. At May's end, he saw a near 4-year cycle begin. Once the Dow hits a new high, trading will be sideways before there's a correction, which will be a great opportunity to buy.

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

Ranking : 5 out of 5

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Bullish - Buy Signals / Votes : 15

Neutral - Hold Signals / Votes : 1

Bearish - Sell Signals / Votes : 10

Total Signals / Votes : 26

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