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

Not worth waste time on predicting interest rates. 
Building a conservative bond portfolio a safe bet.
Advice: own some bonds for steady rate of income & safety in capital.

Would not recommend long position bonds at the moment.
1-5 years good time horizon to invest in bonds.
Short term (6 months/1 year) rates also very strong. 

Canadian average mortgage rate is above 5%.
Low interest rates since 2008 not sustainable.
Rates are normalizing - not high by normal standards. 

Corporations will pay up for stocks if investors don’t.

Corporations—at least the good ones—are long-term thinkers. They know business ebbs and flows, and stock valuations do not always reflect long term prospects. Case in point: Apollo buying Great Canadian Gaming (GC), one of the stocks we covered at 5i Research. Apollo bought GC in the middle of the pandemic, when essentially the company had no businesses operating. But Apollo knew the Covid would end one day, and casinos would open again. It tried to ‘steal’ the company, and shareholders managed to squeeze out a higher bid from them. But Apollo was still able to get GC at a cheap price 

The lesson is to think long term, and remember that while valuations on the stock market may fluctuate, underlying business fundamentals reflect future business prospects.   
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It'll take time to break the sour mood. Dominant thing now is central bank policy. So far, Q2 earnings have been quite strong. But the Fitch downgrade yesterday was a pretty big shockwave and markets responded instantly by selling off. 

The impact of a credit rating downgrade is that the cost of capital goes up. Looking at the US and the national debt, there's a higher cash cost for borrowing and that's significant.

Probably not as well as the consumer thinks they are. We've come through Covid, and when people have had some of their liberties restricted, they tend to care less over the short term. They're going to go on vacation and they're going to spend. Now's their chance to catch up. It's human nature.

It's easy to panic. But if you look at the data long term, the best thing an investor can do is to get in at a reasonable price into good companies that can compound their capital. Then sit there and let it compound for as long as possible. 

Jumping in and out of the markets is a massively flawed strategy. You have to fight that inclination. If you look at the data, people who miss the significant up days in the market have returns that could be 1/3 to 1/2 lower than someone who just stayed in. What helps is if you know more about what you own, and you have companies with strong balance sheets and lots of cashflow that can survive. That gives people more confidence to sit and wait through the bad times.

What's happened this year is liquidity in markets has gone down, yet the S&P 500 is up almost 20%. For the top 5 components in there, the median return is almost 50%. These are all companies that were hated at the end of last year. Tech doesn't work in a rising interest rate environment. 

You never know when things will turn and the returns will come. So you have to get in the right way and be patient.

He prefers the software side, as it's better at compounding capital. Look at perhaps exceptional compounders like MSFT, GOOG, or CSU. Market volatility can work in your favour, as you can pick up good companies on a rough day. For example, the selloff yesterday hit those names really hard.

Difficult to make predictions or to see a pattern yet. He's looking to buy high quality Canadian equities for the longer term. Right now is a very good time to be buying, particularly relative to the US market.

So far this year, TSX is up 6%, while the S&P is up 19% and that's predominantly driven by the tech rally. The TSX PE ratio is about 13.9x earnings, vs the S&P at 19x earnings. That means that the US market is about 50% more expensive than the Canadian market. So the Canadian market is quite good value. The last time we saw this was in 1997, and then Canadian equities went on a tear and did extremely well.

Canadian market is trading at the best discount to the American market than it has in many years. Now's the time to be a little bit greedy on Canadian equities.

Dividend yield of the TSX (3.4%) is much higher than the S&P 500 (1.5%). That means that with Canadian equities, you're getting more than twice the income that you would holding US equities. With inflationary times, it's good to have more money in your pocket. For more information, see the Gauge under Insights at goodreid.com.

In general, likes them all. Over the last 50 years, outperformed the index 70% of the time. Well capitalized, impressive dividend yields. Operate in a cosy oligopoly. Big 6 banks represent 90% market share. Attractive valuation multiples. 

Risk vs. Reward:

There are two main factors to consider when looking at an investment portfolio – risk and return. It is an investor’s job to analyze where their risk tolerances lie and what type of return they are looking to achieve, and to ensure that these two values align. It is a fundamental principle in investing that a higher return is almost always associated with higher risk. It is the nature of the beast that investments which carry high returns also have higher risk, which in this case means volatility. The bottom line is that it takes large gains (100% to make up for a 50% loss) to make up for losses, so investors should always be cautious about what investments they make. 
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Fitch Ratings downgraded America's default ratings, and markets slid. the last time this happened (2011), markets rallied wand recovered within a year. He suspects money managers used today's selling to trim frothy positions. Today was a buying opportunity, but he would wait a little to see if markets decline further before he starts buying.

He predicts a short-term pullback in the S&P starting today. Around Sept. 11, there's an 81% chance of a rally into the first part of November, then a slight pullback, the the market keeps rallying. Be patient for now before pulling the trigger. His prediction is based on patterns since 1924. Also, the CFTC COT report (of spec traders) showed they were selling as the recent market was rallying, which typifies an intermediate pullback.

The 7 high tech stocks involved with AI have lead the S&P for months. Not a problem per se, unless it's the only song in the playbook. This is starting to change because other sectors are rallying. He cautions that things are a little overbought and we're entering seasonality. Plus, there are signs of exuberance. Energy, staples, industrials and materials are starting to show strength and are places to invest in the next 6 months. August-September are historically the most volatile months.