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

Sky-high US inflation and volatility. Extremely important. When rates are this high, and valuations get this high, markets will swing a lot more than normal and more quickly. Seems that supply disruptions will be around longer than anticipated. We'll have this kind of inflation number for another year or so. The markets are figuring out quite quickly where things are at.

Decelerating liquidity. A general definition of liquidity is how fast can you turn an asset into cash? During the pandemic, a fantastic amount of cash was put into the system. The extreme valuations we've seen are a result of that. This year, we have less quantitative easing, interest rates are going up, and no more cheques from the government. So the bubble that was in place last year, is not here this year. The most important thing to understand is how does decelerating liquidity affect the valuation of stocks and asset prices?

Businesses/sectors to focus on. Watch out for high valuation stocks, but at lot of these have already come down in the last 2 months. Think of money moving the way water sloshes around in a bathtub. The money that was all in tech and high valuation stocks is now moving to the other side of the stock market. And that's what he's looking for: consistent businesses with consistent rates of return. You could use the term "value", but these are high quality, established companies. We're not seeing a market meltdown, but rather a movement of money into these more traditional companies.

The story of Nortel. The selloff in 2000 just creamed the market. Nortel was trading at 100x earnings, and it turned out those earnings were fraudulent. It also had a lot of debt, compared to competitors that were debt free. Competitors survived, but Nortel didn't. A company like SHOP isn't really in the same situation.

Hot inflation data and future rate hikes Future interest rate hikes will depend on economic data. Remember that WTI last year this time was $59 and now it's $90, a 35% increase that has a huge impact on inflation. But as we move forward, this rate of change will decline with some hot data (like today) for the next few months, but that will wane. Also, the Fed is still buying bonds now. The next few months will be volatile. She doesn't think the Fed will hike 50 basis points at once. The Fed will be very transparent. Don't forget that the federal debt is $30 trillion, so each 1% increase is $300 billion in interest.

Today's hot inflation number Hikes will happen between March and September, she predicts. Then, inflation will decline. Housing is key, so if housing continues to be strong, inflation could extend longer than expected. Past rate hikes show that the S&P tends to be positive 12 months after those hikes and the market continues growing. There will be choppiness to come, but won't fall back to January lows and eventually CPI will fall back to 3% that the economy can support.

Today's hot inflation number The market has already adjusted to the Fed's aggressive rate hikes to come, so the market is shrugging off today's hot inflation number. For markets to really fall, there needs to be an entirely different catalyst. There is one more CPI announcement before the March 15 Fed meeting when rates are expected to rise, probably by 0.25% and not 0.5%. Even then, markets may not dive on that March hike, because it's been baked in already. Also, profits are growing. The market is likely to rip higher on March 16 after that meeting and expected hike.

Within health, he likes pharma: BMO, Pfizer, Abbvie. They're low-PE, high dividend stocks. The threat of drug-pricing control is way into the future.

Today's hot inflation number The Fed is still behind the curve in raising interest rates, though have done a great job in setting the table amid hot inflation. The markets are betting on a 50% chance of a 0.5% hike in March, but he thinks it'll be 0.25%. He think we're 2-3 months away from peak inflation and will remain elevated beyond the Fed's expectations. Supply disruption has been a bigger cause of inflation than demand. Today's tepid market response is a sign of market densensitization.

There are opportunities in the market. The S&P could possibly re-test January's lows, but stocks already down 30-50% have already hit their lows. These aren't small companies, but big ones like PayPal and Cleveland Cliffs--you can find bargains among these names, punished because of disappointing guidance.

His concern Monday was that Facebook's weakness would pull down other tech majors. Yields were rising to their highest levels since 2019. However Amazon Prime rose prices, but yesterday there was breadth in US markets, and this changed his mind. Mid- and smallcaps are outperforming, for example. International and EM markets are rising. The real enemy is time--the time when the Fed finally announces its hikes. Price damage happened in January, and now there will be a recovery, either V- or U-shaped. The breadth is there--agriculture, materials, financials. We could see a rally.

The other megacap tech stocks won't go down because of Facebook. He still holds a healthy amount of cash. We're in a trading range in the market, and you must be a stock-picker. Watch for fundamentals. He will buy on dips.

We could have seen the market lows last month, but there remain Russian tensions and crude oil prices returning above $90/barrel. If either jumps the wrong way too quickly, markets could fall and re-test January lows. He doubts it. Overall, things are better. America will be de-masking indoors around March 1 and this will encourage people to get back out there. A lot of optimism is building.

Markets and rising rates. He's not tempted to lighten up on stocks. You have to pick your spots, as we're in this reflationary environment. Speed of the move higher in rates spooked some folks, as they weren't positioned correctly. What works with falling rates is different from rising rates. Any time you have a move that happens quickly, and the Fed became quite hawkish, it causes people to move quickly and create some uncertainty. People are figuring out where they need to be. If we thought the rate increases were going to cut off economic growth, then the things that are leading the rally would not be. The things that are highly economically sensitive are leading. If the rate rise slows, perhaps some things will find a footing, and you're seeing this with large cap tech. But they won't become leadership again anytime soon.

Glory days for tech over for now? Yes, on a relative basis. Commodities have been leading the S&P for the last year. More likely to have cyclical, relative advances versus the market. The secular, long-term move is that we get outperformance from banks, materials, and industrials, because pricing is firm and margins are going higher. Huge dichotomy in earnings and revenue from those groups versus the rest of the market.