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

Markets rallied after Jay Powell's comments today about tapering and interest rates. Now, it's done. Some pundits felt Powell was dovish, others hawkish. Once more, Powell threaded the needle. Growth stocks like Eli Lilly then rallied 10%. Powell said that more people are vaccinated, the more stable the economy will be. He also recognized there's more inflation than he originally said. Overall, he was on the mark. Bank stocks declined today, because some investors expected Powell to screw up (he didn't). What's next? Maybe the long-awaited Santa Claus rally, and this may have already started. But things have changed: stocks that trade at high valuations will suffer.

Markets were at all-time highs in mid-November, then Omicron triggered a pullback. Markets then recovered through last Friday, but are shaky now. Omicron remains a concern; science suggests it's more contagious, but the booster shot will likely contain it. The economy is indeed growing with higher corporate profits despite higher costs. Companies can increase prices as well as productivity. This profit growth is the key catalyst for markets going forward. The other key story is Powell acknowledging that inflation will be more persistent than expected. The market is pricing in sooner interest rates next year likely in the second half, but those rates remain very low. When rates start to climb, immediately before the first hike, history shows there are positive returns in stocks. Later in the cycle when the yield curve flattens is concerning. Employment has recovered nicely, especially Canada, which is encouraging, because the Fed looks at employment. The right move by the Fed is to start raising interest rates and not fall behind the ball.

Market Outlook Inflation has to be on your radar, but he thinks it is transitory -- caused mostly by supply chain interruptions. Wage inflation seems to be more pronounced in the lower wage category, which likely needed it anyway. This means we will likely pay more for food service, for example. When production comes back up, he expects we will return to a deflationary market. The world is awash in liquidity which will cause prices in general to return. There are opportunities in many Canadian sectors such as health care, small mid-caps, lumber and other industrials. Yet these groups are producing record results.

We're entering a more hawkish environment, say analysts like Jim Cramer This is why he's sitting in cash. He expects the market to have a knee-jerk reaction down. Look at retail and freights in the past week; the market isn't sure the market will continue to be this strong, while rate increases will weigh. Pick your spots very selectively.

The Fed could invert the yield curve If this happens, it will hurt the banks, because they will lose their spread. But he's not worried about it now. If it inverted, he would hold a lot (more) cash. Possibly, that inversion could lead to recession, but not necessarily.

Today's show was cancelled due to the Bank of Canada announcement .

Doesn't see Omicron variant as damaging as Covid-19. Omicron selloff briefer and shallower than Covid-19. World better prepared for spread of variants(wearing masks etc.).

Today, we saw red-hot inflation numbers which means the Fed can't keep interest rates this low. Today, the S&P made an all-time high, but maybe the reaction is too bullish considering what will come. On Wednesday, Jay Powell delivers his next Fed remarks. Cramer thinks he will move up the timetable of rate hikes, which means the stock market will get hammered. Inflation is rampant, so the Fed has no choice. Don't sell everything, but certain sectors will fall out of fashion, and others fall in.

Reality check: Not all, but certain sectors will decline when the Fed raises interest rates (which will scary). Don't be scared. From 2015-18, rates rose 9 times, but the Dow jumped 50.2% with the S&P and Nasdaq (61%) moving even higher. Take 2015. Anticipation of a rate hike kept market gains limited; the market was doing fine to start 2015 until it got by an nasty correction caused by a crash in the Chinese stock market that spread globally. Consumer staples, tech and discretionary did the best that time while energy, materials and financial fared the worst.

Tempted to go to cash? That's always a temptation, but it's a mug's game trying to second guess the market. All you can do is buy the best stocks you can at reasonable prices. Even if they do get thrown out with the high flyers from time to time, they tend to recover. Financial strength, safety of dividends, and stay the course. In a market like this, what tends to happen is you tend to be a net seller rather than a net buyer. You're probably a bit heavier in cash today than you were a year ago.

US tech stocks. Have been a wonderful gift. As a value investor, there's very little he'd play in that field. Multiples are beyond his reach. He wants tried and true, long-term companies. Most of his investors are looking for capital preservation, not the big swings that you can get with some of the tech stocks these days.

Oil and gas. Yes, he's in. Never totally abandoned them. Energy will be a necessary part of powering the world for the foreseeable future. Yes, lots of divestment. Weaker companies have fallen away, providing opportunities for the larger players to pick up production growth reasonably. Huge swings in oil prices this last year. As long as we can remain in the range we are, companies that are left tend to be huge free cashflow generators. We're already seeing dividend improvement. It's still an area of good value that people can exploit.

Canadian banks. Overall, banks are good to be in right now, given world uncertainties. Rules being relaxed means share buybacks and dividend increases. Earnings potential over the next year will stall out, until the economy gets more settled. Prime area to hold for safety.