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

Is there too much euphoria in the market right now? A mixed bag. Economic outlook very strong with people getting vaccines, economy reopening, pent-up consumer demand. Market's had a good run. Pockets (tech, in particular, and speculative areas) are showing some froth. Up to investors to pick the right securities in the right sectors. Value-based, cyclicals will benefit. Some the of high flyers from last year can take a step back.

Which economically sensitive cyclicals look most promising? A wide range. Canadian commodity companies (copper mining, steel, agriculture). What's good for commodities is good for the Canadian equity market.

Are rising bond yields spooking you at all? Something to be aware of and a little bit cautious. The most highly valued areas, such as tech, and speculative areas are most susceptible to the rising rates. Bond yields moving up sharply has made some of the high PE stocks quite vulnerable.

CAD vs. USD CAD has strengthened recently. One of the better currencies globally in 2021 against a weaker USD. Could be related to energy prices picking up or that there's a cyclical trade underway, commodity prices improving, more US investors moving assets to the Canadian market. He worries a bit longer term. US is in better shape than Canada in terms of the consumer, economic reopening, GDP outlook, debt-to-GDP levels. Unlikely CAD goes back to par. If CAD goes up to 85-86 cents, he'd consider moving some assets back to USD.

U.S. Fed Powell today said pay no attention to inflation, so the markets rallied. Powell says he'll keep rates low into 2023. But bond investors didn't believe him while new investors to markets also ignored. Ignorance is bliss in today's market--younger people who get stimulus cheques this week and will buy stocks. Who's right? Hedge fund managers think Powell is deliberately ignoring inflation and will get out of control; that's why they're selling growth stocks and buying cyclicals. Meanwhile, aluminum, steel, semis, lumber and housing keep rising. This will drive up prices for products like cars, triggering inflation. However, if the Fed wants to slow inflation, it means slowing down the whole economy and there's still a lot of unemployment.

Bond yields are rising, indicating an improving growth outlook. The pace of this increase caught markets off-guard. The 10-year yield leapt from below 1% when the year started to the current 1.6%. Inflation should pick up in coming months. Currently, inflation remains below the norm at 1.3% core inflation, but inflation is rising because so is consumer demand. Will inflation return to the 2% norm? She expects a steady recovery in earnings. Q4-2020 earnings were up 5% YOY and better than expected. Earnings on the TSX and S&P for 2021 are projected to be higher than 2019--that's a recent surprise. Profit growth is broadening to different sectors. Economies are opening up. The consumer is in good shape as household net worth are at all-time highs. This is good. She sees a rebound in spending, especially in service industries.

Canadian banks outlook Hang onto your banks, because they're catching up now after a stagnant 2020. Banks will do well when yields rise and the economy improves, which is expected this year with reopenings. We'll have to wait when government support pulls back or ends in the fall. We'll see how self-sustaining the economy will be. The banks have been prudent in their reserves, and have enjoyed fine growth in wealth management and capital markets. Despite a spike in stock prices, the banks remain below historic PE averages, though it should climb over time. Housing bubble risk with sharp rises in home prices? In Canada, we see this headline every few years. The banks' loan-to-value ratios are resilient. Also, consumers have decreased credit card spending and are taking on more mortgages given very low interest rates. Third, employment will improve in Canada and will boost household income.

Fed meeting. It's not a surprise that the amount of stimulus is behind the support for the markets. The fiscal policy must be financed since there is only so much the Feds can do. Will the Feds provide the support? A year ago, the supplementary leverage ratio was suspended last year so banks could buy treasuries without capital cost hit. It will probably be extended. If they do not extend this, there is a risk to the bond market that will extend to the equity market.

Rising yield. Central banks around the world want more inflation. Bond vigilantes are coming back. The amount of debt in the world at all levels is colossal. The cost of servicing the debt is a big stress on the system. They cannot let interest rates rise before it becomes a massive headwind for growth.

Canadian Housing Market. The bubble talk in the housing market is related to the low rates and how stretched people are. If interest rates go up by 100-150 basis points and mortgage rates go up, there will be less money for discretionary spending. It will matter for those who are really stretched.

What to put in a TFSA. You want to make speculative plays since if you hit a home run you don't have to pay taxes on it. Things like long term innovation, tech, medical marijuana. However, the valuations are quite high in these sectors right now. He would look at gold, silver, base metals that have a couple years of run room left.

Oil. Long term, based on the fundamentals, $50-$60 oil is on the higher end for him. Investment demands points to oil going higher in the shorter term. It seems that the market is set up for oil to shoot up. However, high price on oil is bad for growth. There is more upside. XEG for market cap, ZEO for equal weight in Canada, or XLG for the US. Look at the producers that are under valued relative to price.

Educational Segment. Birth rates have gone down due to covid. Aging demographic and all the debt in the world will also be a headwind for growth. The demographics continues to suggests that the world will continue to have growth problems. There will be a lot of challenges in aging countries like Italy, especially with their poor fiscal situation. Today, 2/3 of the world's population lives in Asia. In the next century, Africa will see the most growth. The growth area will be emerging markets. There is an ETF for Nigeria, NGE, which is quite interesting.

Market. We moved into the re-flation trade. There are adjustments in long interest rates and a bond rally. The discount rates for large cap tech growth names has changed and they will suffer. When they don’t pay any yield it offers a challenging environment. There are other sectors where you have seen that change in leadership. The question is if the inflation we are experiencing is transient or permanent. Grains and energies are increasing in costs. Energy has been on fire the last six months. It does not look like we are going to have a bear market. You may want to increase your exposure to the inflationary trade. It won't be permanent because deflationary forces will always be present. Q3/Q4 we will get more insight into this.