A Comment -- General Comments From an Expert (A Commentary)
COMMENT
Inflation. At a real crux. It is uncertain whether we will see a pure reflation trade or if there will be deflation with growth or not. Demographics and debt as well as tech lead to deflationary outcomes. At the same time, economies globally are reopening and a real surge in the desire to get back to business as usual. Really a difficult question. Equity markets are fully valued and yields are low. Commodity space has seen good returns. Should focus on being diversified. Certainly not 100% certain of inflation or deflation.
COMMENT
Equity markets fully valued. Equity assets are calculations of discounted cashflows. Looking at 1 year valuations, they are based on discounted cashflow rates. When rates are at 0-1%, you will pay more for earnings. All assets are priced higher than historical levels. The reach for yield is because it is hard to come by.
COMMENT
Sectors. In a Q2 situation. Global asset prices is from inflationary growth. Global growth is strong enough to tolerate inflation. This is why Canada is doing well. When inflation overwhelms growth, it causes stagflation. You want something in your portfolio that will do well in all environments. The reflation trade has come a long way and quickly. There is a continued narrowing in the US.
COMMENT
The week in review Under the surface recently is weakness is being masked by strong in tech stocks. On the S&P, less than half of stocks are trading below their 50-day moving average. So, it's not as broad as a market rally as we saw earlier this year. Even within tech we're seeing a bifurcation with the Nasdaq 100 names hitting fresh highs, but some of the Cathy Wood names not. This is no longer the rising tide lifting all boats kind of market. Investors are looking for fundamentals. Volatility will be present in coming months. Retail sales numbers today are encouraging. Spending is happening even as fiscal stimulus is waning. He still feels we're early in this bull market.
COMMENT
The week in review There's a risk that the megacaps are priced for perfection, so going forward they may not have the same catalysts going forward. The market weakness we saw this week is a reversal of the previous attitude of "buy the rumour, sell the news." This recent pullback could set up nicely going into earnings season that we've just started.
COMMENT
The week in review We are at "peak-ish" transitory inflation, but not runaway inflation. It's not only earnings that investors should look at (in earnings season now), but corporate outlook. The banks this week put it good numbers, and the FAANGs have had a good run, so we'll see how tech reports in two weeks.
COMMENT
The week in review This week we saw cyclicals pull back. Powell's testimony reflects a disconnect between his view of inflation and the data we saw. Today's consumer data reflects uncertainty; maybe there's more risk out there. This week was relatively ugly although Apple had a 3.5% move 5 days. No question growth and GDP in the next few quarters will be above 7%, driven by pent-up demand. At some point, though, we'll need to pay the piper. Have we priced in perfection? He sees plenty of good news in the retail story to come; child support cheques are in the mail. Overall, the economy is in a strong place from now till the end of the year. Future data will keep the Fed wanting to see full employment; there's only so much the Fed can do.
COMMENT
Government support is a lasting legacy from the pandemic. We're moving from a period of low growth, low inflation after 2008 to an economic, cyclical reset. With the first, monetary stimulus bore the brunt of supporting the recovery. This time around, the lever of fiscal stimulus was swiftly engaged. He looks at the macro picture, and decides on investments from there. The most important thing right now is they've shifted client portfolios to focus on reflationary themes, and these should continue for quite some time.
COMMENT
A portfolio based on reflation. In the post-2008 banking crisis, USD stayed strong, US equities outperformed, growth stocks such as technology outperformed. These were big trends that have exhausted their lifelines here. Covid wasn't a classic recession with a long workout period. Instead, we had barely a bear market at all. In the period ahead, we can get higher growth and higher inflation. So, the USD should be chronically weak, growth stocks should underperform, and value and international markets should outperform the US. Last month was a bit of a countertrend rally, but these reflationary themes have years to last. Look to things that do well, commodities included, when global growth is higher.
COMMENT
REIT distributions less attractive with higher interest rates? There is interest rate risk. Bonds are pretty much dead money, but yields will rise over the coming years. Definitely a headwind. Utilities, preferred shares, REITs are in that camp. Interest rate sensitives are difficult, and you have to be really cautious. REITs are an interesting space, but 3-5 years out the returns will be subpar.
COMMENT
European bank dividends. The market's become so demoralized about European bank dividends, they have low expectations. As a macro investor, he looks at the behavioural side of things and that's exactly when you want to invest. Dividends were restricted last year, but those are being lifted now. Buy backs will resume and dividends will be solid. One of those beat up value plays that will be swept up in the global recovery.
COMMENT
Next commodities cycle. His team's belief is that commodities have completed their secular downturn. "The best cure for low prices is low prices." Leaders of this commodity bull market will be the base metals like copper and iron ore. Oil is interesting, but not as interesting as the metals. Instead, he'd investigate some of the ETFs that track base metals.
COMMENT
Markets. He's not on the impending crash bandwagon. Current economic backdrop is anything but a crash scenario. Crashes happen rarely and are normally event driven, not part of the economic cycle. Recessions happen for 3 reasons: events (like the pandemic), cyclical, or structural. We're mid-cycle, with economic growth on the horizon, lots of liquidity, savings rates are high, huge fiscal stimulus, we're not over-inventoried. We're in a good position, having come steeply out of the recession. Try to curb emotion and don't listen to the naysayers.
COMMENT
If the bubble burst in one asset class, would that spread? Structural recessions are often the result of a bubble being burst. Meme stocks and crypto run the risk of a meltdown, as they aren't fundamentally structured. They don't have a lot of support underneath them. Blockchain will be part of the future, but what precedes that are periods of speculative growth. These sectors aren't big enough to throw the economy off the rails. 2021 will probably end 10% higher for the S&P than 2019. Market still has room to go.
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