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

The last few days, we've had encouraging data on the inflation front in the US. CPI came in at 3%. Core was still pretty high at 4.8%, but there's a rent component (about 1/3 of the calculation) in there that's keeping the rate up. That number should start to moderate with new supply coming onstream.

This morning, we got the PPI number of 0.1% YOY and core up 2.4%, which came in weaker than expected. This is good news on the inflation front. Somewhat of a leading indicator, as it's a measure at the producer level. Whereas CPI is at the end-consumer level. Those two numbers give a positive tone to the US market in general on inflation. If producers aren't facing higher prices, then they're less likely to increase prices for the consumer.

Right now, consensus is that the Fed will continue to raise by another 25 bps at the end of July. We'll see if that actually happens. 

It's going to be very important to hear what the companies are saying in terms of cost and materials pressure. Is labour inflation starting to moderate? What are they seeing in the economy? What are their capital expenditure plans? What they spend is another company's revenue.

Q2 earnings are forecast to be down by 0.5% YOY. This would be the third quarter where earnings are down, and this one would be the worst. Earnings for Q3 and Q4 are supposed to be turning positive. For the year as a whole, earnings for the S&P 500 companies are seen to be slightly up, and up the following year.

So right now, the market is baking in a soft landing. Typically when there's a recession, corporate profits will turn negative for the year.

Today's topic of the day can quickly displace previous topics that we thought would last for a while. Regional banking issue in the US was a watershed moment because the Fed took its foot off the accelerator of tightening. 

He looked at the moment in time when the big technology stocks took off and left the rest of the market behind, which was early March, and it was almost to the day that SVB went under. It signalled that AI was rearing its head, but that the Fed would become more accommodative because of the problems created by an accelerated move higher in interest rates.

See his article at goodreid.com, under Insights, "US Market Bifurcation: A Story of Two Markets". The story is about those very few (6 or 8) companies that are responsible for the vast majority of the gain in the US equity performance in 2023. The good news is that whenever this has happened in the past, the leaders haven't fallen back to the pack but, rather, the others have caught up. 

To investors, you want to understand what sectors haven't performed well. Healthcare and energy. They've trailed, multiples are at historic lows, strong fundamentals, very good opportunity there.

He doesn't see a prolonged downturn. If you look at sentiment indicators and the AAII numbers, bullish sentiment is at the highest it's been since early 2022. Might indicate the markets are a bit ahead of themselves, which is not unusual. 

At some point, we'll have a normal bull market correction. That's healthy for the market, and it's a good opportunity for those who've been hesitant to enter the market.

You have to be very careful of buying into a company that has a sparkling dividend yield. It has to be supported. If it's not supported, then pass.

What is Cash Flow Yield?

In order to temper inflationary pressure, the Bank of Canada has raised interest rates significantly in the last two years. The most recent one was an increase of 25 basis points to 4.75% in June 2023. As a result, fixed-income assets like bonds become an attractive asset class once again after being ignored by investors for many years due to their low yield.

As investors, we constantly compare available investment alternatives to get the best returns with the lowest risk out of every dollar invested. With interest rates at approximately 5%, conservative investors might only find equity investments attractive if they can get at least a 5% free cash flow yield with a high degree of confidence, in addition to some potential for added returns through organic growth (price increases and volume gains without significant capital investments) and business improvement.

The equivalent yield that a business offers is often referred to as free cash flow yield. Free cash flow yield is basically the net cash that could be taken out of a business each year after taking into account all expenses and capital expenditures to maintain the business without affecting its underlying fundamentals. This free cash flow could be allocated by managers in the best interest of shareholders either to pursue growth through capital investments, acquisitions, or being paid out to shareholders through dividends or share repurchases. 

Consumer inflation came in much lower today, but we're not out of the woods. Key inflation indicator, home prices, are surging (the American dream is nearly impossible for many and that's unacceptable). Also, businesses are still expanding and there remain too many jobs chasing too few workers. The Fed has no choice but to keep raising rates.

Inflation in the first half of 2022 was elevated, up to 1.2% one month, but has since fallen to 0.2-0.3% monthly. So, the US Fed will raise rates once or twice to meet their goal of 2% inflation. It's unlikely inflation will spike. Megatech stocks should do okay in earnings season; they're cash machines. Tech stocks are going to moon: inflation is lowering, the AI craze is on.

Expecting Bank of Canada to raise interest rates this week.
Canadian & US employment numbers stronger than expected.
Inflation sticky, remains a problem for Central banks.
Cost of money (interest rates) major factor in corporate decisions.
A.I. euphoria will remain, as we are early in cycle for this new technology.
Question is how to much to pay (P/E ratios etc.) for certain A.I. stocks.
Very excited about long runway of A.I. technology - believes is early days for potential.

Thinks US Fed should keep raising interest rates, and sell publicly owned debt.
US Fed has expressed goal for quantitative tightening the next 5 - 10 years.
$10 trillion needs to come off US Fed balance sheet in order to stabilize. 
Higher interest rates is going to make US Federal debt very expensive.
Inflation will not allow US Fed to stimulate economy. 

The Power of Consumption Deferral and Early Investing for Retirement Savings.

A reminder to those that are still in the early years of accumulation that time is on their side. Even though the leverage in the later years is much lower than those at the age of 20, at the age of 55, $1 invested growing at 7% per year still represents a 2X return on that investment, certainly nothing to scoff at. Understanding the power of consumption deferral and early investing is crucial for building a successful retirement plan. By capitalizing on the advantages of time and compounding, individuals can maximize their wealth and ensure a secure financial future. Start early, harness the power of compounding, and set the stage for a prosperous retirement.
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There are many more job openings than long term unemployment so it's hard to have a recession when everyone's working. Basically if there is more unemployment then there would be a reduction in wage pressure and consumer spending. There have been wage increases for the lowest 20% of income earners which is a good thing for the economy. There is a report that over half of Canadians are $200 away from not being able to pay their bills. Many Canadians are living paycheck to paycheck but this was the same situation 3 to 5 years ago. Financial stocks are unlikely to be in trouble because we are not expecting a wholesale default on mortgages in Canada. Also a large proportion of Canadians don't own their own homes. There has been a modest increase in defaults on credit card debt and auto loans.

It amazes him Wall Street's undying faith in the Chinese economy, of it being the best market in the world. And yet this is a country with 21% youth unemployment and this is a growth economy? China needs a better relationship with the U.S. 

US jobs report slightly below expectations - but still at a healthy number - which indicates strong economy.
Economy has continued to grow with strength across the board.
Expecting inflation to trend down.
Believes stock market will go higher in the second half of the year.
Corporate earnings less important than forward looking guidance. 
Believes A.I. will continue to be front-and-center within tech sector.

Maximizing Wealth For Retirement.

Starting to save early, even with smaller amounts, allows for a longer investment horizon. This extended time frame creates an opportunity to weather market fluctuations, benefit from long-term growth trends, and take advantage of the compounding effect. The growth of wealth over several decades can result in a substantial nest egg for retirement. Moreover, the power of consumption deferral comes into play. By resisting the urge to spend excessively and instead saving and investing a portion of income, individuals can defer immediate consumption in favor of long-term financial security. This practice, combined with early investing, sets the stage for a robust retirement portfolio that can provide a comfortable lifestyle in later years.

Framed another way, we have taken the average present-day value of a $1 invested at each five-year age bracket with a 7% annual return. For example, between the ages of 20-25, $1 invested until the age of 65 represents a roughly 18 times return on investment. Here we can really visualize the importance of building a retirement savings plan in those years between the ages of 20 to 35.
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