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A Comment -- General Comments From an Expert (A Commentary)
COMMENT
The Fed has already extracted massive pain. That pain isn't coming. It's here. Also, will we see a broad-based recession, or a recession in only employment or housing? Nobody knows. We're working through it. She expects the Fed to remain data-dependent and adjustable. The S&P multiple has slid, and $3 trillion from five stocks has already exited the overall market cap. That's the pain. The worst is probably behind us. Not everything bottoms at once; there are always pockets of great stocks to buy.
COMMENT
Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Dividends Rule. We discussed in a prior column how many companies are increasing their dividends, even with a possible recession ahead. That’s great, but even better is that dividends provide a big part of an investor’s return over time. The amount can vary depending on who is doing the academic study and the timeframe chosen, but BlackRock Inc.’s global equity team not that long-ago suggested 90 per cent of equity returns in the United States over the past century have been a result of dividends and dividend growth. We do not think it is that high, and S&P Global Inc. claims it is around 30 per cent. Regardless, dividends certainly help investors grow their portfolios. What’s more, a dividend helps you keep your stocks during rough market periods. Of course, the longer you hold an investment, the greater its potential compounding impact on your portfolio. The lesson: Own some dividend stocks.
COMMENT
High USD. Incredibly tough for the global economy to manage, as there's so much EM and foreign debt issued in USD. It becomes harder for them to service that debt, which forces them to buy US dollars, and it becomes a vicious cycle. Fed's aggressive rate hikes underpin the whole thing with a high USD and is a negative for the global economy.
COMMENT
Interest rate hikes. Part of the cocktail of a poor market. 10-year in the US just broke 3.60%, and that's never good for valuation of equity markets. Compounded with weak European and Japanese foreign exchange, it makes it hard for trade to flourish, as there are such distortions in the FX market that make planning difficult. War in Ukraine, supply chain issues, after-effects of Covid. Never great for the stock market to have all these unknowns.
COMMENT
Asset allocation right now. Tough the last few years, as the bond market didn't give you, really, any rate of return. Bonds are now safe to enter. Despite roaring inflation, we've discounted quite a bit of it doing about 2/3 of the tightening. The yield curve's inverting, so the long end is outperforming the short end, as central banks can't influence the long end. Even at 6%, you're losing money on an inflation-adjusted basis, but the bond market is poised to do better in 2023-24 as a recession most probably hits. Central banks will probably pivot and lower rates in the second half of 2023.
COMMENT
Banks. He's lightened up on financials. Valuations are compelling, but margin and loan growth will be stagnant. Banks don't do well in recessions. No tailwinds right now. The only thing that saves them is that Canadian banks are trading 1.5x book, PEs are 8x. Cheap. Cousins in US are even cheaper, but they're struggling too. TD has expanded its NIM in the US, so last quarter they benefited the most out of all the banks. His preferences are TD and RY, as they're best in class.
COMMENT
REITs in this environment. Doesn't like office or retail. Likes apartments and industrial. Played this theme through the pandemic, and though that idea's a bit tired, it still has legs. As markets get more uneasy, you want to grab the most defensive assets you can. Apartments and industrial are defensive, but have the dynamics of expansion, so there are tailwinds.
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COMMENT
Markets. Inflation is the primary factor affecting markets today and its effect on interest rates. We're entering a volatile period, which could last a while. We started with a supply shortage, which led to inflation, and the central banks are trying to stifle demand by raising interest rates. The real question is whether we'll go into recession, and he thinks we will, and the further question is how deep and how long. Problems affecting markets will take some time to work out, such as the war in Ukraine, de-globalization, and security of supply. It will be an interesting time, and value will become much more important. The emphasis is going to be on real, near-term, high-quality earnings and good balance sheets.
COMMENT
Can stocks rise along with interest rates? He supposes they can for companies that can pass through costs, such as grocery stores. But no matter the company, they're being hit with costs on the supply side. Can they raise prices as fast as costs are rising? "Effective cost control" is a buzzword for management these days, and often there's not a lot they can do. Also pressure on wages as the cost of living rises. It's going to take some time to work out. Governments have not talked yet about wage and price controls. He's hoping we can get to a more normalized interest rate period. Since the financial crisis, we've been living in an imaginary world when it it comes to interest rates. Those days are likely gone.
COMMENT
Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. In today’s financial market, it feels as though there are too many economic headwinds to keep track of, and investors and non-investors are all well aware of the pending and actual economic woes. We believe that the business cycle is currently contracting and so are forward earnings. Going forward we expect to see continued weak PMI (Purchasing Managers’ Index) readings, thereby driving the PMI moving average lower.
COMMENT
Jay Powell said today that he and the Fed will do anything to get inflation down. Stocks fell on his words, which sound harsh, yes, but will be soothing later. Over the long haul, persistently high inflation punishes stocks, worse than the pain now. There are too many jobs and too many savings out there. It's a brutal way to beat inflation, yes, but necessary. We'll see downward revisions in earnings.
COMMENT
Take these pullbacks as opportunities to buy quality income or long-term growth stocks. History shows we go through cycles of troughs and peaks, but stocks rise long term. Don't chase or buy at once, though. Inflation is trending down, but still too high. So, interest rates will go higher. The inverted yield curve since June is a concern, because that indicates a recession 6-24 months later. Consumer savings built during the pandemic provides a positive cushion which will absorb higher food and energy costs. Also, the labour market is strong, but those savings won't last forever.
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