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

There are some ominous indicators but also reasons for optimism including lots of cash on the sidelines. Everyone is anticipating a recession and so holdings on margin have been sold down leading to lots of money in money market funds.. Also it's a pretty unusual recession when the job market is so good. The Canadian market is cheap at 1 1/2 X Book Value so there is good potential for an increase in equity prices. The Nasdaq on the other hand is at 7X BV and the S&P at 3 1/2 X BV. Therefore the Canadian market looks like the better place to be especially if we go into a recession.

Markets keep climbing up, even though savings accounts and money market funds are paying over 4%. Don't be scared off by doomsayers talking about the R word (recession)--they say that because "recession" headlines sell.

Trends, up or down, end when we don't expect it. Money managers are very negative now, adding to their short holdings even as the S&P has been bouncing up from its lows and consolidated. We now see the largest net-shorting since 2007. Negative! This is nuts. Three times in the past when this situation happened, we got a nice short squeeze, followed by a healthy long-term rally of 2 years or more. Garner predicts that short-sellers will gradually throw in the towel as the markets gradually rise higher. If the S&P holds above 3,850, the market will avoid a nasty wipe-out, and more likely it will move above 4,170 (20-month moving average). This could lead to a long-term bull market. Also, the RSI reading around 50 points to higher markets. Very long-term, she predicts 5,000, but he isn't sure about that.

Bank earnings are beating expectations today while the Fed is signalling progress in inflation but also more hikes
The Fed is not done, and in May they will raise the rate by 25 points, she guesses. Inflation remains sticky and the Fed will likely continue to raise. That's probably why markets are down today.

Core inflation remains sticky. The Fed will continue to focus on this data. He expects the Fed to raise rates another 25 points in May, then we'll see what happens. He expects earnings to decrease 6.6% this quarter. The Fed is in a spot where higher for longer--but for how long?

Believes U.S. Federal Reserve will increase rates by 25 basis points in next announcement.
Most recent jobs report indicates that hiring is slowing.
Tech layoffs, payroll decreases and slow down in economy are good for inflation.
Immigration increasing in USA also a good sign (higher productivity).
Prefers companies that are well positioned to perform over the long term.
Does not pay too much attention to short term gyrations. 

 

Opportunities In Financial Sector: Recently, the dislocation in the Financial sector has created some interesting opportunities for investors. Due to the hike in interest rates, banks have recorded significant losses in their bond portfolios, which in some cases is even more than the equity capital leading to the collapse of Silicon Valley Bank, and more could be expected. As a result, shares of the Financial sector generally have been under tremendous pressure. However, the market does not panic for no good reason, there is a chance that one of these US banks could go under due to a liquidity crisis. As the US government publicly announced the deposits would be protected and covered by the Federal Deposit Insurance Corporation (FDIC), the risk of a contagion effect on the systems is low. Therefore, we think the current drawdown could offer good long-term opportunities for attractive entry points into the sector. 
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We're at an interesting point. Inflation is in the rear view mirror as it continues to hit lows. But the central banks continue to have to put up a hawkish stance, because they're not quite at target. Maybe when rates stop being raised there will be a rally in the markets, but there's a lot to happen between now and then. Starting to see economic growth slow down as a result of rapid tightening. We really don't know what the impact is on companies and the economy yet. 

Most people think there will be a slowdown, but the question is how severe will it be? Too early to put up the green flag and push all your chips in. Manage your money with prudence, hold some cash, and wait to see what the result of the tightening campaign's been.

Absolutely. It's not unexpected that we'll see earnings decline over the next few quarters. Will we beat or miss expectations? What guidance are companies giving? We're fresh off the heels of the March banking crisis. There's still a lot of uncertainty in the markets, and markets hate uncertainty. 

Definitely in the last few days, the market seems to be taking a lot of this in stride. He'd still be a bit cautious. Never too late to buy some put options as protection or to raise a bit of cash for what he sees as a volatile few quarters.

Always. Sharpen your pencil. There are lots of companies that are extremely undervalued and are pricing in the worst case and most pessimistic of the scenarios. But others are trading as if there's no economic slowdown coming. Be careful of where you place your bets and allocate capital.

He wouldn't be afraid to add to any of the Canadian banks at these levels, even though there's still some hair there. We saw net interest margin expansion from rising interest rates, and now we're going to see if the credit side is more of an issue that what the street currently thinks. He thinks you'll be surprised how well the banks can perform in this environment. It's an oligopolistic structure for them, and they always find ways to make money.

Gold's a great place to be at the moment, as interest rates are checking back. It provides some portfolio protection. When inflation and growth are slowing, gold tends to perform well. Smaller names are riskier. 

He owns FNV and ABX, and is looking at WPM. The larger caps have less operational or geographic risk. Gold, in general, is an underowned sector and so should do well if the economy goes the way he anticipates.

Great businesses to own for the long term. Some are better to not trade, but just own. Great tailwinds over the long term. But it will be a bit of a bumpy ride. Just because META rallied 65% doesn't mean it's a good buy here. He's been using them as hedges. When you get a nice market lift as it has over the last few weeks, probably a good time to add put protection. So he's been using the tech sector to fund some of that protection, as it's seen some really good runs.

Businesses in the semiconductor space aren't doing well right now. Companies like TSM, Samsung. And that will flow through to the FANGs, as they're the ones that are laying off tons of staff. 

Challenges ahead. If you own them, don't trade. If you don't own them yet, don't add.

Inflation cooled (today's CPI number) but the core number remains high. He guess the Fed will raise another 25 basis points. More important is what's the Fed's damage to the economy to this point? How will the market react? Expand valuations which is undeserved now.

The Fed should pause. We all know inflation was out of hand last summer, but since June 2022, the CPI headline has been 3.7% annualized. The real Fed funds rate is now a very positive 4.875% and will be more positive as inflation declines. If the Fed raises by 25 points, it will put a lot of pressure on the banking system and trigger flows out of the system. The Fed is wrong to focus on core inflation.