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Financials will be important, and other earnings as well, especially given the sensitivity to the consumer and interest rates. But the very strong and surprising US employment report on Friday has really changed the dynamics and thinking around Fed policy, plus around what the economy's going to look like for the next 6 months or so.
Over the weekend, several upgrades to the economic outlook and downgrades to the recession risk. That's a pretty significant change from last week.
Economy's stronger than they thought. So we're not going to get the aggressive rate cuts that were priced into the market.
People are asking him about buying fixed income ETFs, and he's saying no. Where you want to buy them is between 4.5-5%, in order to benefit from falling rates. Don't buy after rates have significantly fallen and are much closer to a trough. In around the 3.75% range there's no trading value in bonds. If we start to see the 10-year back up to higher levels again, there's some value there.
Big dock strike last week, back at the table last couple of days. Interesting that the dock workers don't want the use of technology to replace jobs, so they don't want efficiency. When a company has to pay their workers more money, the way they offset that so it doesn't hurt margins is to invest in tech.
It speaks to the idea that inflation's going to be stickier, as will wage demands. More than we've seen in any cycle going back decades. Where rates can come down to, and where inflation ultimately settles, will be higher than what we've been used to for the last couple of decades.
Transportation and infrastructure, and getting products to market, are key. Supply chains shut down during Covid, and that's where inflation came from. If workers insist on striking, and there are shortages on goods, prices will go up. It makes the job of central banks of the world way more difficult to keep inflation contained.
When Covid hit, and bond yields were super-low, bonds did not protect client portfolios because yields were starting to rise. If inflation is going to be more persistent, and bond yields are going to be where they are now or slightly higher for the next 6-12 months, then bonds are not a safe part of your portfolio from a total return perspective.
If you're 70 years old and in 100% equities, then yes you probably should have some fixed income in your portfolio. Look at an XCB or something like that that's shorter term. There are some ETFs that are income-oriented for older folks.
When Covid hit, and bond yields were super-low, bonds did not protect client portfolios because yields were starting to rise. If inflation is going to be more persistent, and bond yields are going to be where they are now or slightly higher for the next 6-12 months, then bonds are not a safe part of your portfolio from a total return perspective.
If you're 70 years old and in 100% equities, then yes you probably should have some fixed income in your portfolio. Look at an XCB or something like that that's shorter term. There are some ETFs that are income-oriented for older folks.
Right now and for the next year or two, interest rates are priced in to coming down in both Canada and the US. He doesn't think they're going to come down as much as is priced in.
In Canada, 5 x 25 bps rate cuts are priced in looking out one year. That's about right, and means that interest rates will be 125 bps lower a year from today. Overnight rate now is 4.25%, so 125 bps takes us down to ~3%. So a 3-year GIC would be in the range 3-3.5%, compared to the 5% of today.
When the government lowers rates, GIC rates go down. And vice versa. We're now on a rate-cut path because we're worried about a slower economy.
You have to define short-term. This is a vehicle that, in the long run, will lose you $$ if you hold it for more than a number of months. Because of the structure of the curve, this is constantly losing money. For example, if you put in $700 two years ago, today it would be worth $56.
Weeks to maybe a month (or a bit longer, but not much) is as long as you want to hold this. Which means that your market timing has to be really precise on when that correction's going to be. He's been on BNN for 25 years, and he's not good enough to make a call as to when a correction is likely to be.
This tool is never, ever a no-brainer.
Today's segment focuses on the surprising strength of the US jobs report last Friday. Over the weekend, he noticed a fairly significant number of earnings upgrades, as well as a changing perception of markets for the next quarter or two. Goldman Sachs' chief economist also downgraded risk of recession to 15%.
Labour market is stronger than expected. People are working and spending more money, so corporate earnings keep the party going. As we enter earnings season, we'll be looking at what companies say for going forward. Goldman Sachs upped its price target for the S&P 500, forecasting earnings at $268 for 2025 and a target in the 6300 range; for 2024, earnings at $241 and a 6000 target.
Goldman's chief strategist says the market's trading at 22x and that's fair value. Larry doesn't agree, as a historically fair multiple is around 16.5-17x. With tech being a bigger part these days, you could argue that a fair multiple is 19-19.5x, but not 22x. Still expensive.
Looking at a chart of standard deviations, the market's cheap and a buy when it's somewhere below 1 standard deviation. Right now, we're on the expensive side of the range, relative to forward-based earnings. You want to buy dips.
Looking at the 30-year bond yield, it's at 4.27%. But the earnings yield of the S&P 500 (take forward earnings of $268, and the current number of $236, and divide it by the S&P at 5700) is 3.81%. This shows you that when the earnings yield of the market is high, and bond yields are low, that's when you want to buy stocks and sell bonds. Today, stocks are expensive relative to where bonds are trading today from an earnings perspective.
You're much better off buying bonds than stocks at this point. He's not saying there are positive returns, just that treasuries are a better deal.
His friend-guru in the States says that all asset classes are overvalued, relative to inflation and risk premiums. Not a lot of places to hide, except for shorting some positions. He's cautious on markets.
