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

Strength of Canadian Economy:

The Canadian economy grew at an annualized rate of 3.1% in the first quarter of 2023, as per Statistics Canada, while the US reported the number to be at 2.0%. US GDP is on track to have increased by 2.3% in the second quarter of 2023, while S&P Global calls for a dip of 0.6% in the Canadian economic activity in the second quarter. For the year, however, S&P Global expects the real GDP to grow by 0.8% for Canada.

The remarkable unemployment rates in both countries are playing a key role in elevating consumer confidence and fostering a positive economic outlook. Growth is only expected to decelerate slightly due to slower growth in disposable income. This can be due to high mortgage costs in Canada or student debt payments in the US.

The strength and resilience shown by the economies, the ongoing strength in the job market, and the continued growth in GDP suggest that the Canadian and US economies will continue to grow, albeit at a slower pace. The odds of a recession are sliding.
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It's been 9 months since the lows of October 2022. One word describes the rally, it's all about resilience. Many challenges such as a banking crisis in the spring, rising rates along the way, lingering recession worries. Markets are all 30% or higher at this point from the October lows. 

Earlier this year, there were concerns about market breadth. Recently, we're seeing breadth expand. About 75% of the S&P 500 constituents are trading above their 200-day moving averages. Broader participation in the rally from other sectors, which is very healthy.

In the last month or so, technology has not been the leader. Financials and energy have been the leaders. We've seen expansion in the rally. 

He attributes expanding breadth of the S&P rally to inflationary pressures cooling, which will lead to a pause in central banks' interest rate hiking. Potentially in 2024, we'll see a lowering of interest rates. Futures in the back half of the year show we may see some falling interest rates in the US. A stable interest rate environment is always good for stocks and bonds.

He owns MSFT, but getting a bit pricey based on valuation. Also AMZN and AAPL, neither is too pricey. GOOG is a name to look at. AMZN is rebounding and in a clear uptrend. On his radar is FTNT.

He's very careful of the tech market. We had a pretty decent run until a month ago, but now rotation out of tech. If you look at the S&P Tech sector, it's trading around 7.1x price to sales. 10-year average is 4.5x. Years 1999-2000, it was around 7.5x or so, and then the S&P Tech index dropped 83%. Not that that's going to happen, but we need to be aware of valuations in the tech space in general.

See his Top Picks.

Many ways to play the sector. He owns SU and CNQ. There are also US names such as XOM. You want to have a few names, as each of them will have its own issues with management, safety, and the like.

He's following the macro inflation data carefully, and that's what's tossing the market around. Both stocks and bonds have been very volatile this year as investors fear higher, more persistent inflation, more rate hikes, and a slowing economy. Sentiment has been swinging quite wildly. 

It comes down to the data. We're seeing inflation come down quite rapidly now YOY. He thinks that's going to continue, and we should hit the target rate of around 2% by year end. The rate hikes are coming to an end.

He's always been in the camp of a soft landing, and still is. Very strong employment numbers, and as long as people have jobs they're spending money and paying their mortgages. Housing market had a very mild correction. He's not seeing much of a slowdown, except perhaps in durable goods. Services are still trying to catch up from the pandemic, but this should taper off by the end of the year.

Things are slowing down, but we'll see prices coming down and rate hikes coming to an end. 

Odds of Recession.

Since the middle of last year, the dominant topic of discussion revolved around the possibility of a recession, be it a soft or hard one. This prevailing thinking stemmed from the belief that global economies would grind to a halt due to the aggressive measures taken by central banks to combat surging inflation.

Economists are now softening their stance on recession predictions. With easing inflation, a strong labor market, and resilient economic activity, Goldman Sachs cut the chance of recession from 25% to 20%.
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Advising investors to be cautious, but expects market rally to continue for 6-7 months. 
Inverted yield curve: short term interest rates higher than long term interest rates - suggesting investors worried about markets.
Historically, inverted yield curve has been a good predictor of recession.
A.I. boom & strong stock market confusing investors. 
Strong economy is also broadening out to all industries - not just tech. 

The market is very overbought and it's too late to buy a stock you've been following. You failed to catch the upside, so wait for a swoon (pullback) that hits the entire market (or an individual stock right after earnings, like Tesla). Also, don't buy before an earnings' report--that's a sucker's bet.

Rising Interest Rates: Should I sell all my bonds?

Most investors know that bond prices decline when interest rates rise. Many investors are wondering why they hold any bonds at all. We think this thinking needs to stop. First, bonds are not in your portfolio to make capital gains — they are there to provide balance and regular income. Second, as we’ve noticed this week, the fear of higher rates can hurt the stock market at times, also. Going 100 per cent equities from a 60/40 stock/bond split could have serious consequences to an investor. If not in performance, then most definitely in stress and sleep. We would suggest sticking to your overall investment plan, and to not “react” to short-term market events with big portfolio changes.
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He's seeing conflicting economic data, a tug of war, and sentiment is stretched. For instance, interest rates are rising while homebuilding shares are hitting all-time highs. He's cautiously invested. The S&P and Nasdaq have been on a tear while the TSX has risen respectably, but lags them. The TSX trades at a 60% discount to the S&P in terms of price-to-book, a gap that's a 20-year highs. The good Canadian banks look fine now. He will discuss these later today.

Visa and other big names report next week. Can earnings deliver on these higher multiples? 36x for the top 7 stocks, but only 17x for the rest of the market--which is reasonable. Unsure if the top stocks can deliver, though the others can. Next week, watch for reports from healthcare.