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

Fed's performance so far. They were right to raise when they did so that they'd have ammunition when needed. He'd give them an A. The only fumble was last fall when clear that economic data starting to wane. If they'd pivoted in October, the meltdown wouldn't have happened. They did the right thing in January.

Earnings season kicking off. 64/500 companies on the S&P have reported. Earnings coming in pretty flat, which is good enough for the market, with bond yields where they are and the Fed ready to ease.

Inverted yield curve and Ray Dalio's concerns. Does give credence to Dalio, but he's too early. Worrisome sign that Europe is in a downturn. But when the Fed does lower, the 3-month bond rate will go lower, pivot, and steepen the yield curve.

Sell US bank stocks in favour of credit card companies? No. Concern about net interest margins, but they'll be fine. During last 2 rate cuts, bank stocks outperformed the index. Exceptionally cheap compared to their growth rate. So don't sell now.

What catalysts might get the Canadian energy sector going again? Need oil prices to stay here. Different policy out of Ottawa. Need regulations to ease.

The slight sell-off today was due to the summer doldrums during a big earnings week. People are hesitant despite all the market noise. But investors are jittery because we are late-market. This earnings season is important, because it sets the tone for the end of the year. Keep your pencil sharp. The heat is off the health sector a bit following rhetoric from Washington against the US healthcare companies last spring. A result of that was a sell-off in health stocks, but earnings reports are coming in robust. He is more confident about this sector now than just a few months ago. It looks unlikely that Washington will push through new health care policies, like price transparency on TV ads. But expect continued volatility. You have to be in health care now given valuations, tech innovations, developing markets and aging demographics.

How many healthcare stocks should you hold in a portfolio? Worldwise, health care makes up 12-15% of the market, but only 3% on the TSX, and 70% of that is cannabis. Canada has limited choices in health care stocks. A portfolio should hold 10% health stocks, and 15% during volatility.

Market Outlook The US-China trade dispute plays a major role in base metals. However, gold has benefited from the uncertainty. He thinks $1500 is possible for gold. The US Fed might look for a 50 point drop within two cuts. This might be an insurance move by the Fed as earnings have been a little less than stellar.

TSX He envisions a trade settlement and strength in gold, so he sees another 5% of upside in the TSX before year end.

Market Outlook He is of the opinion that the US Fed will cut rates and this is helping fuel the latest rally in the market. But he wonders if we are pushing on string and might make matters worse down the road. He sees a lot of excesses like crypto currency. He thinks the Republication party is wanting to keep things strong going into the 2020 elections. He thinks the energy sector could be producing up to 5 million barrels per day in Canada if the proposed pipeline projects in and out of Canada would have been completed as originally proposed. Instead the US has increased its production to take this opportunity away. WTI prices are near $80 Canadian per barrel, so things are not that bad. Maybe now is the time to buy when everyone is heading for the door.

The S&P 500 positive news is that it broke 2,950 after three tests in the past 18 months. 2,950 is his support level and he believes it will stay above that. He is concerned about put-to-call ratios being high and the VIX being complacent at 12. The smart money is not confident, but retail investors are--which is a red flag. The market is bullish.

Today's China GDP number is the lowest since the 1990s. The Chinese economy is really growing at 3%. The official numbers are manufactured. Year-over-year numbers are slightly weaker. China is slowing and will continue to. Also, their size of debt has more than accounted for that growth, which means there is truly zero growth. Leverage! The credit markets have never been frothier globally and it will end badly. The global fixed income markets, namely the inverted10-year US yield curve--portends a big slowdown ahead. Considering inflation, there is a negative real return on every bond in the world. The growth outlook is catastrophic for bonds. The upcoming U.S. earnings report will test the currently strong markets. Q1 saw slightly negative earnings growth; Q2 predictions are 2.8% (vs. historic the markets beat by 2-3%, because expectations get beaten down). So, at minimum, we will see flat earnings growth for the first half of this year, at worst, slightly negative. The markets are growing because multiples, not earnings are expanding, because of expected rising interest rates. Not good. Markets could keep grinding higher based on FOMO.

How can there be such low unemployment rate in North America in a late cycle? The unemployment rate was extremely low in late-2007 on the eve of the Great Recession and this is historically normal at the end of a cycle. The difference today is the inflation pressure. Late-cycle and full employment should push up wages that forces the central banks to raise interest rates. This time, the Fed went from near-zero to 2.5% which is less than half in a typical tightening cycle. This cycle is very different from the past, leaving the future uncertain.

Educational Segment. Has tech peaked? Paul Desmond wrote a white paper on market tops. He said there are four characteristics including the difference between large, small and mid-caps. By far, tech has been the leading market sector, outpacting the S&P by 10% as seen by comparing the VGT (338 tech stocks) vs. the broad U.S. market. FB and MSFT lead the FAAANGs year to date as Google starts to break down; the other FAANGs are seeing market tops. The large tech stocks make up 95% of this sector while the small-caps are breaking down this year. This is a classic signal of a late-cycle.