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

Reconciling those down years. No one style or investment strategy is going to work every single year, but over the long term it's hard to bet against the stock market.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Inflation Effect on Bonds: Rising inflation leads to capital losses as bond prices decline. If inflation remains within an expected range, short-term yields rise/fall more than longer-term yields. However, if inflation moves out of the expected range, longer-term yields rise/fall more sharply. The inflation jump recently seen was out of the expected range, but expectations have adjusted quickly.

Stocks will rebound this year, but not until the second half. There could be a rolling recession as some sectors are hit, then others. High interest rates will effect earnings in the coming months and that will negatively effect markets. But this is not 2008, no financial panic. That's why he feels investors will step back into market in the second half of 2023, perhaps before that. He remains overweight US stocks. What is your strategy is the market is stable or drops 20%. Be prepared--what sector will you focus on?

Where to write covered calls? Any bank, oil stocks or ETFs of both. But ask if you want growth or yield? When is the ex-dividend date? He prefers 6-month contracts to get a good bang for the buck. To go shorter duration means taking on more risk.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Inflation Effect on Cash: Inflation has been the new buzzword since the start of the year. So much so, that the market expectations shifted, and valuations are seeing a new range. While some of it was expected, the magnitude and tempo were astounding. Initially, central banks in North America termed this inflation as ‘transitory’ and have since changed their stance. Considering the market mood, it is important to be aware of how assets can be impacted by inflation. Starting with cash, which in a savings or GIC accounts, can be termed as short-term interest-bearing instruments. As short-term interest rates adjust with expected inflation, such securities can earn a floating real rate. Such-term interest-bearing instruments are considered zero-duration and inflation-protected assets, and therefore are attractive in a rising rate environment.

2022 will be the fourth-worst year since 1945 and the worst since 2008, BUT the market tends to avoid back-to-back down years. The S&P was 20% this year. This is the first negative year in the last four. Top of mind for him in 2023 is the Fed: we're closer to the end of their tightening cycle after an historic 400 basis points hiked in 2022. In 2023, we could see 50-75 points, then the Fed will likely hold. Also consider the lag effect of all that happened this year, starting with labour and housing. Beyond that there is some opportunity.

2022 will be the fourth-worst year since 1945 and the worst since 2008, BUT the market tends to avoid back-to-back down years. The S&P was 20% this year. The best thing about 2022 was that expectation were reset to reasonable so that investors are more rational. This portends well for the next 3-5 years. In the decade before 2021, the market returned 16.5% annually. Everyone is so miserable this year, but remember you gained a lot in 2020 and 2021. So a 6-7% return next year is fine. However, her biggest concern for 2023 is that earnings come in worse than the market currently expects.

2022 will be the fourth-worst year since 1945 and the worst since 2008, BUT the market tends to avoid back-to-back down years. The S&P was 20% this year. The best news is that 2023 won't be 2022, which we want to say goodbyte to completely. The consensus is that the CPI print on Jan. 12 will be benign, and tax-loss selling will be well behind us. Therefore this sets us up for a likely recovery rally heading into earnings. He won't go beyond that. Tech: In Dec, 2020, the Russell hyper-growth index's PE was around 45x, but is now below 20x. We've seen a valuation recession for risk stocks. Volatility remains high for growth/tech, so there could be more PE contraction. Wait until there is a better macro environment for tech/growth.

Believes rising interest rates will depress economy in 2023 as effects are felt by consumers. Stimulus packages will wear off in 2023 and economy will see negative growth. Believes US Dollar will lose value in 2023 and emerging markets will see growth. Canadian economy will benefit from falling US Dollar. Multi-national companies will also see gains from emerging markets growth. Consumer discretionary companies are going to feel pain as consumers try to save money. Pipelines, REITs and telecom companies look good in this economy.

Trevor Rose’s Insights - Trevor’s most-liked answers from 5i Research. Weathering a Recession: Maintain your Strategic Asset Allocation & Staying Focused on Your Goals. During times of volatility like this, it is important to stick to your asset allocation rather than making emotional decisions. Your asset allocation should be designed keeping in mind your constraints, liquidity, time horizon, and financial goals, with an aim to achieve the desired level of return with the appropriate risk level and factors, one is comfortable with. There is some room for a tactical tilt, and other than that, it is best to revise asset allocation only when there is a change in constraint, belief, or circumstances. The market tends to over-react both ways. When numbers and times are good, every investor is an enthusiastic bull and seeks growth and innovation. When volatility hits, investors turn to panic-selling with seldom any thought to their allocations. Changing your allocation based on market sentiment and/or current performance can hurt more than benefit. Reacting to a down market is an easy way to derail the progress made towards reaching a financial goal.

Markets. You have to think about discount rates and where interest rates were in 2020 relative to where they are today. Back in 2020, the risk-free rate was 0%. So if you tack on a 2.5-4% discounting rate to the present value of future cashflows, you end up with very high cashflows, which is why at 0% interest rates, growth stocks did very well. Today, the risk-free rate is around 4.25-4.5% on 3-month T-bills. So if you tack on 2.5-4% there, you end up with a 7-9% discounting mechanism, which brings cashflows down and, therefore, earnings down. That's why growth stocks capitulated the most in 2022. As Fed and others continue to raise rates, they're still going to suffer. We've already seen a move from growth stocks to value stocks, which are trading at much lower multiples with higher dividend yields.

Impact of strong USD in 2023? Emerging markets, because they trade at the lowest multiple and because their currencies are down the most against the USD this year, could be the news of 2023. But only if and when the Fed stops raising interest rates, as that could cause a drop in the USD. Then you'd see EM currencies start to rise, they'd have more spending power, and it would get the economies moving in the right direction. If the S&P is trading at 22x earnings, and the EM indices only at 10x, that's where he could foresee investors moving, since that's where the value is right now. The USD rose along with interest rates, because foreign bond investors would buy US treasuries because they have the highest rates out there, and would have to convert local currencies to US dollars.

Portfolio construction. He still owns 30 stocks at a 3% weighting each. That's been his strategy for 40 years. Each stock you own thereafter does not reduce your risk at all. If one of them becomes a 6% weighting, he automatically sells half. A stock that does get to 6% has probably gone too far, too fast, and will come back down to earth or at least go sideways. If a stock makes an all-time high, chances are the next year's going to be pretty ugly, as we saw with RY, SHOP and TSLA. His #1 rule for picking companies is that if you choose one that can generate free cashflow and grow it, you have a long-term winner.

European airlines. Problem is that airline companies tend not to do well over time. They tend to be heavily loaded with debt and cyclical in their cashflows. Bad investments because they tend to have high capex, which wipes out most of their cashflow. Do well when economy does, but do poorly when economy weakens. Inflation's running at 10% in Europe. Europe probably won't see an increase in travel because it would be very expensive. 2023 won't be a good year. He avoids the sector.

Criteria for selling stocks. The only stock he's sold in the last year was FCFS, pawn shops through Latin and South America. It made an acquisition of Cash America. He sold on an ethical issue. Cash America was charging US military personnel almost 60% on money borrowed against articles being pawned, which broke the rules, but they refused to comply. He doesn't regret selling. Another reason to sell would be if a CEO is retiring and there's no succession plan in place. Third reason is if Board of Directors is not as independent as expected. Another is if executive compensation is beyond expectations, for example, if it's greater than 1% of stock options to the float. For example, PG has 10% of stock options going to executives every year. It's like having an open chequing account for people whether they've done a good job or not. Another reason would be if a business is getting old, tired, and mature and they're not able to keep their revenue or dividend growth going. Also alarming would be if free cashflow disappears as might be caused by higher interest rates impacting debt repayment. All these situations create red flags, and his firm has to make a decision to continue holding a stock or to get rid of it. He assumes that whatever governments or central banks do, good companies will roll with the punches and deal with it. As long as there's a good business model in place, it will just be business as usual. Companies that are elastic, where they make all their money in the good years and lose it in the bad, tend to have that cyclicality that can be more affected by changes in interest rates. His companies have very little or no debt, and now they're even earning interest on cash invested.