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

Believes interest rates will determine performance of stock market in 2024. Does not think US Fed will be cutting interest rates back to historic lows anytime soon. Stock market, and related indices higher than anyone would have predicted. Investor fears of multiple compression in tech stocks has not materialized (tech stocks nearing record highs). Believes stock market and related indices higher than anyone would have predicted. Is expecting rotation into dividend, and Canadian bank stocks in 2024. 

December Market Update:

The U.S. S&P 500 ended the week up 0.3%, while the TSX was up 1.3%. All but one sector rose this week. Consumer staples and consumer discretionary added 2.9% and 2.2%, respectively. While industrials edged up 1.9%, financials and real estate added 1.7% each. Information technology gained 1.3%. Energy ended the week slightly up 0.5% while materials gave up 0.3%. The most heavily traded shares by volume were Hut 8, TC Energy, and Bitfarms.

ISM Chicago PMI declined to 46.9 in December from 55.8 in November, lower than the expectation of 50, indicating contracting in manufacturing activities. On the other hand, US mortgage rates stabilized this week, averaging 6.6%, down from 6.7% one week earlier, but remain on a downward trend. The Canadian dollar was 75.62 cents USD.
Unlock Premium - Try 5i Free

Lots of issues that can happen, as there are every year. Generally, we should see a reasonable up year next year, especially in Canada. Interest rates are at peak, or will remain stable, and may go down in the second half of the year. 

Canada has a far more interest-sensitive market, and banks and utilities should do better because of that. That's what's held back the TSX for the last little while.

A lot of things that pushed markets up over the last year will still be there. US interest rates are in that period of peaking. Inflation will come down. Rates won't be cut in March or April. Chance that Fed will move cutting of rates into the second half of the year, and that's a smart move. Don't need to push rates down until inflation is at the level they want. If they cut rates too quickly, risk that they may have to push rates up again if inflation takes off. Wise to wait until inflation gets to the 2% they want and then lower rates.

Lower rates on the short end will be good for the stock market, funding, and IPOs.

Yes, that's why banks and utilities in Canada will do well. Those kinds of stocks will do well around the world. If you own these types of companies, not only will you get the dividend that you've been getting all along, but you'll get some capital gain that you haven't been getting in the last little while.

Europe tends to have more dividend-paying companies, whereas the US tends to be more about growth. It's more about the stability of rates, rather than rates coming down, and they should all do better.

If you're a long-term investor, you have to keep your money in the stock market. Very hard to get out and then get back in again. If you have the long-term view that stocks grow your wealth, then you have to put your money to work on an ongoing basis.

Makeup of the S&P 500 is dramatically different than 20 years ago. More tech companies now, no longer dominated by lower-PE industrial companies as before. So you can't sit back and wait for that 20x PE.

You look for really good companies that you like, put them in your portfolio, and hold for the long term. Stick to this strategy, and you'll always do well. Could also dollar-cost-average into an ETF on an ongoing basis.

Yes, he manages the Black Swan Dexteritas Global Tech Hedge Fund. In the first 6 months of the year, the markets just kept trending up. But the past 6 months will be indicative of 2024 because it was more about active management. 

August, September and October were all down, and then it just snapped back. During those down periods, you have to put a bit of a hedge on. Then, with a bit of luck and skill, you take it off when it starts moving back up.

Interest rates. You can also get a feel of the price action through the capital flows coming out of the options market. You can get a sense of when you'll get a change of wind in the markets. The options market is now bigger than the actual stock market.

It's more like an evolution. AI came up with all the new layering of the semiconductors that allowed processing to be a lot quicker, and with bigger data sets.

Now it's all about translating that back to the customers or the enterprise through "natural language processing". A sub-sector of that encompasses the large-language models. Allows data to be processed and generates human-like text or voice. Computers are becoming more human-like. They speak to the user, and processes the information that comes in.

Data sets are expanding every second. A process can actually mature with every bit of data that comes in.

Utilizing Valuation Multiples and Takeaways:

Over and undervaluation is the most common use, as we can identify which side companies lie on by comparing to their industry and peers.

Another key element for P/E and P/S is deciding to look at trailing or forward measures. Trailing looks at how a company is valued based off the previous twelve months, while forward looks at the next twelve months. Forward measures typically have greater significance in stock analysis because investors are more concerned about future growth, but there are still useful insights that can be drawn from analyzing both concurrently.

Valuation multiples are a broad topic. It is always good to consider multiple metrics when valuating an investment decision and additionally compare these to the industry and peers. Doing this ensures an understanding behind the value of what is being paid for and how it stacks up to other opportunities.
Unlock Premium - Try 5i Free

Believes markets are almost too bullish right now. Appears US Fed is pivoting towards dovish economic policy. Stocks are not cheap, but performance has been great for investors. Importance of investing in tech becoming more prevalent with A.I. growth. Generating growth in profits will be important for tech to demonstrate. Geopolitical risk always something to be aware of, but not investing based on speculation of further conflict. 

Believes second half of 2023 was volatile, but overall is bullish on markets heading into 2024. Markets appear to be broadening out in terms of economic performance. The opportunity to add fixed income to portfolios will present itself with US Fed pause on rate hikes. 4-7% dividend income from blue chip stocks, an excellent proposition for investors. Consumers appear to be slowing in spending patterns, which will slow economy, but not as bad as predicted. 

ETFs vs. Mutual Funds: Key Differences

Trading Flexibility

ETFs can be bought and sold throughout the trading day at market prices, offering more flexibility than Mutual Funds, which only transact at the end-of-day NAV.

Management Style

ETFs are typically passively managed and aim to replicate the performance of an index. Mutual Funds, however, are often actively managed, with a fund manager making investment decisions in an attempt to outperform the market.

Fees

ETFs generally have lower expense ratios than Mutual Funds due to their passive management style. However, since ETFs are traded like stocks, investors may incur brokerage commissions.

Minimum Investment

Mutual Funds often have minimum investment requirements, while ETFs do not. Investors can purchase as little as one share of an ETF.

Tax Efficiency

ETFs are often more tax-efficient than Mutual Funds due to the “in-kind” creation and redemption process, which helps limit taxable capital gains distributions.

A Canadian Perspective

In Canada, both ETFs and Mutual Funds are widely available. Canadian investors can access a broad range of ETFs on the Toronto Stock Exchange (TSX), and Mutual Funds through various financial institutions.

One key consideration for Canadian investors is the tax treatment of foreign dividends. Canadian investors holding U.S. or international ETFs in non-registered accounts may be subject to foreign withholding taxes.
Unlock Premium - Try 5i Free

Yes, a big change. In the past, Powell's always been quite hawkish about fighting inflation, getting back to target range. Now all members are focused on when they should start cutting rates. Don't have to wait until inflation actually gets to 2% before they start cutting. If inflation keeps going down, and they keep the Fed funds rate flat, that means the real rate (net inflation) is actually going up and that's quite restrictive for the economy.

After Powell mentioned this shift during the press conference, we saw a very strong, positive reaction in both the bond market and the stock market.