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

July Market Recap:

The TSE stock index was basically flat (+0.31%) over the monthly period ending August 2nd, 2023, and up 2.85% over the past year. The 2nd quarter GDP in Canada slowed to 1% while in the USA it grew 2.4%. Consumer spending in Canada was resilient, but still slowing in Canada. The IMF upgraded global GDP outlook to 3% (2.8% in April), but global economic risks remain tilted to the downside with disappointing Chinese economic recovery as one reason, as well as simmering geopolitical tensions. The June CPI was 2.8% in Canada and 3% in the US. The Federal Reserve and the BOC both raised their policy interest rates by 25 bps during July and suggested that more hikes may be necessary.
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Really bifurcated market. Magnificent 7 have dominated index returns to the upside. A narrow collection of stocks have been rewarded in the market, yet there's a whole bunch that have been left behind. People are coming to grips with interest rates being up, there's a lag, debt-ridden companies are having some issues, and the economy is definitely slowing. 

Yes, that's a theme in the portfolio right now. Certain stable businesses can carry a bit more debt. He's calling for a higher for longer interest rate environment, and companies that carry a lot of debt are facing significantly higher interest rates when they go to refinance. Interest payments come right out of bottom line earnings, so that's going to be a drag for companies with a lot of debt.

Within the banks, there have been some outperformers and some underperformers. At the end of the day, all the banks are starting to show increasing loan losses. There's always a lag on the impact from higher interest rates, and the economy is now starting to see the effects.

Banks have big balance sheets with a lot of assets and a lot of debt. When things start to go wrong, it can cause some consternation among shareholders. They've broadly underperformed this year and may continue to struggle. Canadian banks are in a better position than a lot of US banks, but it's an area you want to keep your eye on.

He's definitely underweight.

Coming into 2020, it was the worst performing sector on the market. The scaremongering narrative of oil/gas coming to an end has been bought by a lot of uneducated investors. 

Money's gone away from the sector and a lot of people refuse to go back. This has provided an opportunity for the rest of the investing community that looks at stocks in a pragmatic way. You can pick up cheap assets with a good business that will make a lot of money over time.

Oil's hitting 6-month highs. There's a reason for that: a supply/demand imbalance. Oil will probably stay here or go higher over the coming year. This will probably encourage more activity.

Most of the stocks in the sector are undervalued and a buy. If you buy now and just sit and hold, you'll be rewarded from here.

Renewable power producers are, by and large, buys here. There's been huge hype. It's a growing area, but currently only a small part of the energy pie, around 10%. 

If you look at increasing the green power grid, you get to a certain point that if you're all wind and solar, you start having blackouts and brownouts because it's just not reliable enough. It will take a huge amount of investment to solve these issues by, for example, improving storage capacity. Politicians are being too idealistic on progress.

He categorizes nuclear power as reliable, green power. That's why Ontario has a good power grid, because 60% of our power comes from nuclear. It should be a growing area, but people have negative views on uranium and radioactive waste. Nuclear is one of the few options that makes sense, and people have to get comfortable with it.

He buys individual stocks, not funds, so he can't recommend a clean energy fund. See his Top Picks for a green energy name. When you choose your own stocks, make sure to do your homework and understand the fundamentals.

Otherwise, buying a TSX or S&P 500 broad index ETF is a good way to go. Dig in and look for the lowest management fees, some as low as .05%. He's seen ETFs with fees of almost 1%, getting close to what mutual funds charge, and that's not cheap.

It's been a good year. There's a lot of comment on how just a few stocks are doing a lot of the heavy lifting. It's starting to get better on breadth. 

There are still a lot of companies that have been left for dead over the last 12-18 months, especially sub-mega cap, or in the small-mid cap space. So there are a lot of interesting places to try to find value right now, but also some areas you need to be really careful with some of the valuations we're seeing.

That does happen. You do see the flows in and out of sectors and back into those that haven't been working. You need a lot of stuff to happen for that to work, so you can see why the big-caps are a crowded trade as people look for where to make money.

Meanwhile, things that are more sensitive to the economy and the data aren't performing as well. Canadian banks are a good example, lots of headwinds there. We're seeing the reality of what the underlying economy actually looks like versus what we hope will happen because of AI or a short-term move in travel demand.

None of the Canadian banks are inspiring. Headwinds -- higher costs, layoffs, not a lot of catalysts for growth. A bit early for the sector. Banks are nervous about the future environment. Long-term will do fine, but you need some patience right now.

Seems banks are trying to batten down the hatches on the cost side, rather than trying to aggressively grow the revenue side. This might impact the potential sale of Laurentian Bank.

Though some of the heat has come out, travel stocks have done incredibly well over the last year. It's only a matter of time before that demand starts to fall back to earth. It's already starting if you look at credit card spending, with cash and savings balances lower. 

This trend will flow into the travel industry eventually, and then you'll start to see some cracks on the growth side. Avoid right now. Sector is not cheap.

Economic news will continue to get softer/weaker, which is good news for the economy, as long we continue to glide down and flatten out. Yields are edging down. (Stocks are rallying this week.)

80% of reporting companies in this quarter beat. A year ago, it was 77%. The strength comes from companies selling to consumers, speaking to consumer strength. 88% of consumer discretionary companies are beating on EPS, and 62% beating on revenue. Only 51% of the S&P is beating n revenues. Same with healthcare.

Jay Powell's tone last Friday scared some people, but made other investos feel comfortable, including her. The PC number continues to decline. We haven't entered a recession, and 3.5% unemployment is unlikely to lead to that.