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

Have seen many indices hitting all time highs but there is a correction happening under the surface. Have seen the small and mid cap area not do much since March of this year. Now it is changing and we are seeing relative strength. As companies continues to grow, coupled with the fact we are heading into the strongest seasonal period shows good opportunity. Could see a broad-based market rally.

Due to the waves we have seen due to covid, we have seen hospitality and travel still affected. Delta caused things to be impacted and things slowed down again. There is always a lag effect to the economy. We will see more airline bookings and travel.

Inflation risk. Up for debate right now, the way it hasn't been for quite some time. He's always focused on protecting capital against inflation, as that's how you increase your standard of living. He didn't abandon positions in commodity producers last year, as many did. Diversification is key.

Sectors. Avoid technology. Valuations are extended compared to where interest rates are. The sector most inversely correlated to rising rates. A lack of dividends in that sector also makes it unattractive for his clients. This market is incredibly policy dependent from both the Fed and governments, and we don't know what the future path will be. Own infrastructure and hard assets to protect yourself. He's trimmed weighting to insurance broadly and moved into utilities, renewables, and infrastructure.

Fossil fuel producers. He maintained positions and continued to add on weakness since 2014. Tried to migrate to best in class as they all got punished, so highest quality at discount prices. He has about a 7.5% position in oil and gas. More positive on gas than oil, and so his position in gas has grown quite a bit in the last 6 weeks or so.

Inflation and supply chain issues. On her radar. Inflation's come up since the spring. Upcoming earnings season will be interesting. Last quarter was very strong, as it has been all year. Indices are higher, and it's all due to earnings growth. Last quarter, S&P 500 profit margins reached an all-time high of over 13%. Companies are investing in automation and technology to offset wage and cost pressures. Profit growth remains a primary driver for markets. This is not a surprise. Growth has slowed, but it looks as though it's just been delayed, not destroyed. We'll have to see when companies think shortages will be alleviated.

Transitory inflation? From January, 2021 EPS numbers have been revised up over 20% for the broad indices, and that's driven the price gain. Inflation debate will be ongoing. Central banks feel it's transitory, and her base case is that it won't last. But we don't know how long it will last. Economic shutdown, lots of money pumped in, and demand has come back strong. Where vaccination rates are lower internationally, it will take time for those countries to sort themselves out.

Dividends and share buybacks. Lagged the growth in earnings. Regulators have imposed restrictions, but these will relax, and that will provide further impetus to the stock market.

Sector focus. She owns pipelines, but has been out of the oil and gas sector for a few years. She's rotated to more secular growth companies, who have more control over what they charge for a product. As well, companies that are not as economically sensitive.

Gold and inflation. Gold is usually considered an inflation hedge. Gold price hasn't done much this year. She has no exposure. She wants a company that can grow regardless of the underlying commodity price. If you really want to take a position, look to large cap, diversified, geopolitically safe, more senior producers such as AEM. The whole sector is seeing consolidation, and not at premium takeout prices either. That tells you about the growth, when getting larger through a merger is the only way to achieve it.

Canadian banks. The loan to value ratio on the mortgage books for all the big Canadian banks is very low. The housing market would have to really collapse for them to get hit. Reasonable valuations. Expects earnings to grow. Release of loan loss provisions will help support dividend growth.

Banks vs. utilities. Why do you have to choose? You can own some of both. She likes them both for income. Attractive yield, with some share price appreciation. If you want more growth, go with the banks. Their earnings will grow over time, and at a faster pace than the utility companies. Though banks will somewhat reflect the economy, they're well diversified. Utilities are much more defensive, so you won't get the earnings growth of the banks. You should have a bit of both.

Consumer product sector. Her preference is for consumer products companies that have more exposure to EM, where demand over the long term should be stronger with product categories that are growing at a higher rate.

Today's inflation numbers may signal a peak or near-peak. Maybe. Also, historically over 30 years, oil prices peak now--mid-October. Also, corrugated cardboard (boxes) are signalling peak sales, and this product is a signal for inflation. Don't panic; be patient. The seeds of deflation are being planted.

Tapering is the biggest risk in the market now. Liquidity has driven the market during the pandemic. Recently, the US Fed announced it would start tapering and the US Treasury said it will build up its cash balance. Altogether, this will impact all assets globally. That said, these measures can be moderated as we go along. He can't say what the timeline would be, but a change is coming. Inflation is definitely a big risk, but less than tapering. Inflation will likely persist for a while, which will impact purchasing power. To hedge against this, invest in diversified, defensive stocks.