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

The U.S. market is up mostly due to seven companies and in Canada Shopify and Constellation Software represent 2/3 of the gain.The two biggest sectors financials and energy are flat (financials) or down (energy). The six biggest banks and four largest energy companies have a yield of over 4% and all have raised their dividends over the past year. They also offer growth and capital appreciation. Generally dividend yields in Canada are higher than in the U.S. where companies tend to concentrate on buying back stock.

Believes inverted yield curve suggests recession on its way (short term rates higher than long term rates).
US Fed pause on interest rate hikes only temporary.
Stock market valued too high, waiting for correction.
2000-2002 bear market similar to what is happening now. 
Enormous valuations in tech (Tesla etc.) are not sustainable. 

The rally has been broadening only in the past month. In late-April, the rally was dominated by the top 7-8 megatech and telecom names. Now, small/mid-caps are rallying too. Why? Because interest rates are peaking. We are not yet in a recession, so that adds more confidence to the market. The PE (ex-top names) is 16x 2024, which is not bad.  AmEx is 13x, for instance. There is room to grow, maybe more than the top names. The market can rise higher.

He's bearish about the market's current rally. This is purely rising on momentum, and will momentum move up or down. Jerome Powell basically guaranteed a July rate hike in this week's comments. Also, the yield curves continues to invert.

The current rally has more room to run. Earlier this week, 12% of the S&P are making 52-week highs, the highest since April 2022, which was the first bear market bounce last year. Is now another beat market bounce. Well, average 14-day RSIs around 60 vs. the mean of 50--the highest reading since summer 2022. The average S&P stock is in breakout mode, pretty good. Also, the Russell 2000 of small-caps is getting stronger with a YTD return of over 7%, though trailing the 10% of S&P; 39% of the Russell names are above their 50-day average, historically high.

This rally will continue at least short term, based on the most recent macro data of moderating CPI and PPP data. Payrolls remain strong. The rally is expanding past megatech into areas like industrials.

Paying Too Much For Growth:

A quick reminder is that valuation matters, as high-quality growth is not worth an infinite price. A good company can always turn into a bad investment if being purchased at an excessive valuation. While a bad company can be a solid investment if being purchased at a sensible price. Investors need discipline in how much to pay for a company. For example, many current tech stocks are currently trading at 20-30x revenue. Although these tech companies may have good business models, paying this much for a stock means it has to earn a lot of money in the future to justify the price.
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Yes. Oher things such as Q1 earnings and the debt ceiling seem to have fallen away. Inflation is stickier than people had thought. Central banks have a real issue, because they need to bring down inflation. Either they increase rates to dampen inflation, or they keep rates higher for substantially longer than people think.

Inflation is very bad for the economy, as it affects the lower end of the wealth spectrum. Those people spend proportionately more on the basics like food. It doesn't affect someone who's wealthier.

Fed and BOC are probably doing the right thing to increase rates until they can get the economy to slow down and bring down inflation numbers. Just as the BOC did, the Fed was right to take a break on rate hikes, to see where the numbers are falling in. Remember, the BOC started hiking rates before the Fed did.

Still some complacency in the market, VIX has been relatively low over the last couple of months. You may see some volatility on and off over the next several months. This provides opportunities to buy things you really like at good valuations. 

Investors have been climbing the wall of worry for the last little while. There's also complacency. The S&P can probably do OK if people digest the fact that even with increased rates, they can feel comfortable with how the environment is going to look. You may get slower growth and slower earnings growth, which is what's going to cause the volatility. 

He doesn't see it collapsing. Even if it goes down to the October 2022 lows, that's a buying opportunity for the next little while.

Not trading at high multiples, around 1.1-1.5x book value. Great dividend yields, and all have increased over the last little while and will continue to do so. Lots of capital, except for CM, even if OSFI decides to increase required levels. Difficult macro environment, which is reflected in the banks. 

TSX can't go up unless the banks go up, as banks are 30% of the index. Good time to buy. A year from now, banks will be substantially higher.

Highly regulated, in good shape, oligopolistic. They experience volatility due to events in the States, but we won't have a collapse in the banking industry.

That looks to be correct. Even the pause is pretty symbolic. There have been 10 or so interest rate increases in an aggressive rate tightening cycle by the Fed. What's unique about the inflation numbers is that we're lapping a year ago, when inflation peaked. 

May/June numbers are expected to come down significantly. This, combined with turmoil in the banking industry, gives the Fed the opportunity to pause. They can give forward guidance but still wait for all the data to roll in.

They are. You're starting to see it with all these large purchases. And you're even starting to see it in the employment numbers, with businesses pulling back. Governments around the world are very indebted, which has the potential to crowd out crucial spending. 

Over time, the goal is to moderate interest rates. But right now, the goal is to put the clamps on inflation.

We're going to be close. Not this year. The June reading will be closer to 3%, and that's where we started. And that's the one thing that will stop any type of interest rate cuts.

Giving him confidence with Canadian banks and large US ones is that they're coming into a period of economic weakness with the best balance sheets and capital levels they've had. A contrast to 2008-09 where the banks had lower-quality assets and were much more levered. 

Highly unlikely they'll need to raise equity. Dividends are being increased. Current valuations allow you to get in at a weak time and plant seeds for the future.