At the Money

[MUSIC PLAYING] Hello, and welcome to At the Money. I'm Daniel Cheng. And I'm Graham Ingram. Today is Tuesday, September 24th. [MUSIC PLAYING] Big news. Last week with the first Fed rate cut coming out at 50 basis points, market was somewhat divided on what the expectations were going into it. What do you think, Dan? Yeah, it's really interesting. I think leading up to it, I think we talked about it last time, like 25 basis points was what we were expecting. But right before the actual meeting, the bond market was actually pricing in almost like 50/50 odds of a 50 basis point cut. So I'd say, not everybody was surprised and it wasn't like a complete outsized move. In fact, the bond market reaction post the cut was fairly muted and yields actually finished the day higher. So we've talked about that previously as well in terms of repositioning our bond portfolio. We did that earlier in the year to extend duration a bit because it's not sell the news, but the moves typically happen in advance of that. So I'd say it's more of a recalibration or normalization of where rates are. And then Chairman Powell was very specific in articulating that. Don't get used to this as the norm per se. And going forward here, which we'll talk about more today, is probably a bit normalized pace. But yeah, very interesting. I mean, positive thus far for equities. So we'll dive deep into that. So let's discuss what equity performance looks like after the first Fed cut. We've been sharing this and another version of this slide with clients over recent months. But essentially, what it's showing is how do stocks react to the first Fed rate cut? What is the reason for the rate cuts? Is it a normalization of policy where inflation has come down and there's no need to be as restrictive anymore? Or is it more relating to deteriorating economics and a worsening job picture? We would argue it's still more in the former camp where inflation has come down from recent peaks. But there has been some uptick in unemployment rate on both sides of the border. So as you can see in the numbers, instances where we have soft landings. So economic growth slows but does not turn negative. That's the best outcome. And when that happens, it is more positive than you would historically expect stock market returns. Average one year returns in those soft landing scenarios is about an 11% return on equities. But more importantly, the drawdown in those years is only about 4%. So that is much less volatility than you would normally expect. However, it's not to say that a recession would be the end of the world either. There's many instances, in fact, 10 out of the last 14 years where the first Fed rate cut is followed by a recession, but you actually still get positive returns. The one-year returns from those 10 of 14 years is 8%. However, you do see higher volatility in those periods with average drawdowns as much as 16% That's a little bit higher than normal. So a normal drawdown intra year is only about 14%. So in recessionary years, we do expect more of a pullback. Same analysis, but different question. What happens when the Fed cuts when equities are within 2% of all time highs? Carson Investment Research did this work recently and found that 20 times out of 20, the market is higher on average, up almost 14%. So the takeaway for me, Dan, is if the economy slips into recession doesn't necessarily mean equities are doomed. We would definitely expect to see more volatility. But a lot of times the market can look through short, shallow, or even predictable recessions. That makes sense. Just to go further on that point, I think a lot of the-- we'll call it bears out there looked at this cut and they've been pointing to the jobs market as something to be concerned about. And Powell did a good job in his messaging that his move was again, one of recalibration as opposed to deterioration in the economy. And in other words, that means less about inflation and-- or more about inflation than a slowing job market, although the latter may be called into question in the coming quarters here. So worries have significantly increased in financial markets about the durability of the US economic recovery just to coincide with the point that you made about the markets and a potential recession. But US unemployment is still low. It's been drifting gradually higher. And that historically doesn't happen outside of US recessions. Unemployment typically rises quite dramatically when the Fed is cutting rates. And there have only been a few times when this didn't happen. 1984 and of course '95 would be the most recent examples when the labor market was strengthening, not weakening. But we think there's enough reasons to believe this time is different, thanks to an unusual and exceptionally large US government budget deficit that is keeping a floor under US demand. And the US Federal Reserve obviously will continue to lower interest rates against that backdrop. And so we expect gradual, limited pace of cuts. I believe the Fed's articulated at least 50 basis points more this year and then 100 basis points more in 2025. So clearly, the Fed's willing to do more should the economic backdrop prove softer than expected. Of course, in Canada, a very different story. The unemployment rate here climbed to 6.6% in August from 6.4% in July, with the rise in the number of available workers again outpacing job growth. The Canadian labor market continues to soften. And so a very different picture, I would say, than what's going on in the US. And so we continue to expect that the Bank of Canada is going to cut overnight rates again next month for a fourth consecutive time, and probably continue at a pace faster than the US. So different economic scenarios. But trajectory-wise, now both countries are cutting rates. Let's take a look at valuations. The bear camp is definitely signaling that things aren't cheap here, and we wouldn't necessarily disagree with that. But let's delve into that. The market cap weighted S&P 500 is trading in the low 20 times, just under 24 times earnings. That compares to the long-term average of about 18 times earnings. This is still well below the .com multiples that we saw of 2000. Interestingly, though, the equal weight index trades at a much more reasonable 18 times. And this takes out the concentration bias of the mega-cap companies that are trading at upwards of 30 times multiples. RBC US Strategy, Lori Calvasina came out this week with updated numbers of her forecasts. In it, she details the fact that she thinks, based on 2024, she thinks valuations are full and fair. So maybe not as much room to run in the near term. But when you look at earnings growth next year in the 10% to 15% range, if you apply a multiple on that, she got to an estimate of between 6,200 and 6,500 on the S&P 500. Similarly, last week BMO came out and raised their year end target for this year on the S&P 500 to 6,100, which is a PE multiple of 24 times. He did note that while that seems high, there's still in the soft landing camp, which we agree, and we're basically starting a new rate cutting cycle, which justifies a period where you could be north of 20 times earnings. And this happened in the mid 1990s. Very interesting and makes sense where we're sitting right now. I think the next obvious question, once you go through valuations and where markets are is, especially in the window we're in right now, everybody is focused back on the US election. Lots of excitement and news around that. And so we've shown it a few times, but election years tend to be very good for the US stock market. And of course, this year has been no different. But I think if you zoom in on all of those charts that show the historical pattern for election years, and you look at exactly where we're at, you usually hit a pocket of volatility in that September, October period. It makes sense from a seasonality perspective. This is generally the weakest period of the year. Also, there's just a lot of noise around the election. And so I wouldn't be surprised again to see that happen. The question that we get asked is, did the Fed's 50 basis point rate cut take a pullback off the table this year? Perhaps. But we've seen how quickly sentiment can change this year. One bad jobs print could be all that it takes. And so we're mindful of that. And again, if we saw a pullback in the next call it five weeks, even between 5% and 10% call it, I don't think that would be abnormal. And to be honest, we'd probably look at leaning into that as an opportunity to deploy cash and put money to work because we still think the year finishes off pretty strong. And you did a good job of highlighting the historical numbers around how the market does post a rate cut as well. So I think we're still cautiously optimistic is a good way to put it. The S&P 500 has been largely unchanged since the middle of July. But a lot has happened under the hood. So there are companies that have outperformed in that group would be some health care providers, some alternative energy providers. Utilities continue to perform well. We'll talk about that in a second. But on the downside, there's been some weak performers in the retail space. A lot of the US dollar companies and dollar retail stores have done quite poorly. Supermicro computers down 50%. They had some issues with financial reporting. So the point being there is change under the hood. And we would highlight a few things. The S&P 500 equal weight is hitting new highs. The Dow Jones Industrial is hitting new highs. The TSX is hitting new highs. US Mid Caps are also hitting new highs. And most recently, we've seen underperformance of the Mag Seven. So those mega-cap technology and AI companies. So while you see at a surface level, the index is unchanged over the last six to eight weeks, there is some sector rotation happening, and that is we think is healthy for the market. We could be down in a period where because the top names have so much weight, you see technology maybe takes a pause. The S&P 500 at an index level maybe is flat to maybe down. But I could also see a period where seven or eight of the 11 sectors in the index are positive. And so that really just speaks to the rotation that we're seeing and we think will continue to play out for the rest of 2024. We have positioned our portfolio for that rotation. And what I'm talking about is having a healthy weight and equal weight index. But we've also talked about the quality factor as well, which reduces some of the concentration of risk of the market cap weighted index. Just the last one for me, Dan, we'll talk a little bit more about AI in an upcoming episode. We think we'll dedicate an entire podcast to AI because there's so much to talk about here. But really interesting, at the end of last week, we saw Microsoft sign a deal to restart nuclear power plants that was decommissioned in the US with all of the power generated to support their operations. There's such a draw for power for these AI data centers that companies like Microsoft are going out and signing long-term deals. We won't get too much into the details, but the interesting read through is natural gas is really seeing a bid on the back of that. So the fact that we're going to need so much power, you could actually build a similar amount of power generation capacity of natural gas for the same price as what they're spending to restart it. It's about $1.6 billion. But you could do that in half the time with building natural gas. And obviously, it's going to be a cleaner, improved emissions profile from natural gas. So the read through for Canadian energy is a lot of these long-term deals that producers are signing is a net benefit for Canadian producers which should see the benefit of price maybe not immediately, but over the next one to three years, I would say. That's so interesting. I think one of the things that we've talked about in the past, too, is how this artificial intelligence theme has so many derivatives or tentacles of ways to invest in and the industries and players that are going to get affected. I think there's a lot more opportunity than perhaps what most people are focused on. So this is certainly an area that we're looking at how we can ensure portfolios are positioned for this as well. And so I look forward to that conversation. What are we thinking about in the calendar coming up, Dan, what's on your radar? Always lots of data points. So this Friday is August US PCE inflation data. As noted by Jerome Powell last week, there's growing confidence that inflation continues to trend to the Fed target of 2%. Friday, we're also going to get Canadian GDP for July. GDP up here, obviously, continues to slow. And on a GDP per capita basis, it's actually expected to decline in Q3, Q4. So in other words, population growth is likely the only thing keeping GDP positive right now at the expense of productivity. More importantly, next week, we're going to get a host of employment numbers, including job openings, ADP, initial jobless claims, and the US employment and wages on Friday, October 4th. And then we got the next Bank Canada meeting October 23. Market largely expects 0.5 basis point cut. And then we're going to have the US election. But the next Federal Reserve meeting, interestingly, is actually November 7. So it's going to be right after the US election. So lots to watch on the calendar. Stay tuned for our next episode. And thanks for listening. [MUSIC PLAYING]

Hello, and welcome to At the Money, I'm Daniel Cheng. And I'm Graham Ingram. Today is Wednesday, August 21. So, Dan, we're in the same spot in the markets as we were in mid-July at the time of our last podcast. Not much has happened since then, right? [CHUCKLES] That would be a bit of an understatement. August started off with a bang, actually August 5 to be exact, which was a holiday here in Canada. You had some extreme moves in the market, actually. I saw one quote calling it "Japan's Black Monday." The Nikkei index, which is Japan's stock market, was actually down 12% on that day alone. And North American markets here were actually down 2% to 3% just on that day. Again, the Canadian market was closed, but this is the US and other markets. So the peak to trough drawdown actually from the July highs to August was about 9% for the S&P 500, 5 and 1/2% for the TSX, which was about half. The NASDAQ, the tech-heavy NASDAQ was actually down 14%. And small caps as measured by the Russell 2000 was actually down 11%. So it was actually an extremely volatile few weeks here. Just for reference, though, our balanced portfolios were actually down less than half of that for the most part, of course, depending on your asset mix would have experienced a slightly different drawdown. But suffice to say it's been a very bumpy few weeks here. What actually happened, Graham? So first, on July 31, the Bank of Japan raised its overnight policy rate for the second time this year. Just to give some context, the BOJ raised the rate from 0.1% to 0.25%, so pretty incremental. But obviously, that was the second rate hike. And the first one that happened in March was actually the first time that they went from negative rates to positive rates. Japan has been dealing with deflation and slowing economy for decades. So even that incremental change in policy rates had a big impact. You might have heard about the yen carry trade, so that's where investors would borrow in yen terms, converts to their local currency, and then buy assets, whether that's Treasury bills, Mag 7 stocks, whatever you have. Since then, the Bank of Japan has walked back that hawkish stance. So they've come out and said there's no further plans to raise rates again. And that's calmed the fears of the market. In addition, during that period, we had one weak ISM manufacturing data point. It was the fourth month in a row of a contraction. On the same day, on the 31, the Federal Reserve did not cut rates. Now, while the bond market was not pricing in any expectations of a cut, many economists were saying how restrictive monetary policy has been. So overnight rate, 5%, inflation, only 2% or 3%. So there was some calls for the Fed to start cutting as early as July. As we now know, that did not happen. And then lastly on that Friday was a big jobs number that disappointed, nonfarm payrolls added 114,000 jobs where the estimate was 175,000. And conversely, the unemployment rate rose to 4.3% versus the estimate of 4.1%. Looking back with the benefit of hindsight, there's likely some seasonal impacts and some weather impacts with the hurricane in the South. So next month's data will be important, but that spooked the market and was one of the things that added to the panic. Over that weekend, Dan, we got news from Berkshire Hathaway and Warren Buffett that he sold another large chunk of his Apple shares. That took his year to date selling of Apple to about half of what he owned. So in itself, not a big mover, but when you compile three or four of these things together, really added to the negative sentiment that happened on that Monday where we saw large drawdowns. How's the market fared since then, Dan? Yeah, since then, I think if you've been on holidays for the last two weeks, which hopefully many of you have been, you'd be forgiven for thinking that absolutely nothing has happened because since then, we've gotten a few better reads on initial jobless claims as well as GDP. And corporate earnings have actually been OK too as well. And so that's actually helped to calm a lot of the fears that caused that, we'll call it a mini-flash crash in the Japan market. And so as such, as of today, markets have effectively regained all of that correction in a very short period of time. What's really interesting is on that day specifically, what we saw because of all of those things that you just talked about was an incredible explosion in what's known as volatility as measured by the VIX index. So volatility or the VIX had been trading at a very low level given the relative bullish sentiment and the strong performance of the market so far. And when it moved, it did so in very rapid fashion, particularly on August 5. And this is probably consistent with what you talked about there, Graham, about the forced selling or the unwind of that yen carry trade. But what's really, really interesting is the VIX actually hit levels that have not been seen since the global financial crisis and COVID. And this is peak COVID volatility. So think March 2020 when most people were very concerned about what was happening in the world. The volatility in the markets was extreme. On August 5 of this year, the market experienced similar levels of volatility. And I'd say very different circumstances, so probably got a bit out of hand or extreme from that perspective. And I think the key takeaway here is, though, and we shared this data in our weekly client letter a few weeks ago, but returns in the stock market after really big moves in the VIX actually point to the fact that should normally be buying or adding to the market when the VIX is above 30 as a level. And so it got up to an intraday level of 66% or something like that during that day, which is basically panic selling. And so the statistics say for the S&P 500, when the VIX actually spikes above 30%, the 12-month forward returns on average are about 20%. So tendency for it to be a very good time to put money to work. Obviously, it's difficult in the moment, but if your time horizon is a bit longer, obviously a good time to move some money into the market. So on the whole, we were probably due for a reset of sentiment and expectations, and obviously that happened very quickly. How's the earnings season holding up, Graham? Yes, we're about 94% of the way through reporting on the S&P 500. We've been harping on earnings for most of the year now. And the reason that is it continues to be one of the pillars of the bull case for this market. Earnings continue to hold up well. And in aggregate, earnings estimates continue to climb. Interestingly, though, after some of the Mag 7, so the high flying tech companies and the AI-related companies reported their Q2 results, a few of those companies did have negative revisions to Q3 estimates from analysts covering those companies. But on the bright side, what that means is if total aggregate earnings are still climbing, then you're getting some participation in earnings growth from the other 493 and the other sectors of the market. So we take that positively. Our read on the AI-specific is companies are spending tens of billions of dollars, but they're just not quite yet seeing a return on that investment. This is longer cycle type investments. So we'll see if that comes to fruition. But I think probably through some of the AI craze and hype analysts probably had too much baked into their estimates for this year. So this could continue. Companies citing the word "recession" in their Q2 calls was also very low for the second quarter. If you look at previous quarters going back to 2021/2022 when we were at the peak of expectations of a recession imminently, companies were citing that as a reason for poor performance. But really, this quarter that we're in right now, only 28 companies sourced recession as something that they're thinking about. So I thought that was interesting. One thing I think a lot of people are probably thinking about, especially as investors, is with all this volatility and all these things going on in the market, What do you do with an investment portfolio? And where should you be investing? And so we've talked a lot about investing in high quality companies or the quality factor, and we've written about it numerous times over the years as well. But I wanted to revisit that today because it's very timely. And so just for the purposes of this call to keep it short or this podcast to keep it short, we'll call it quality and define it as companies that have a high return on equity, very stable earnings growth, and low financial leverage or debt levels. What quality companies do is they tend to outperform in times of heightened volatility like we just went through. They tend to also outperform when the market is strong and trending, which you could say has been the case since the October 2022 low. And that begs the question then, if quality does so well in all those types of markets, when does it underperform? And it generally-- quality companies will underperform coming off major market bottoms when there's a really high risk on mentality and a chase for beta, this low quality or junk rally term you've heard, which is really unprofitable companies and the really speculative things. But other than that, quality tends to actually provide a very, very stable and positive rate of return. And so we actually initiated a position in a quality screen, quality factor ETF earlier this spring, and we actually recently added to that position as well because we think that's going to actually do well in the current environment we're in, as well as the environment in front of us. So lots to digest in the last few weeks. Where does that leave us on the markets? We continue to be constructive for the following reasons. The earnings growth story is intact, as we mentioned. Rotation continues, it's a little bit slow but steady, but continuing to move in the right direction. One example of that is the Equal Weight Index has hit new all time highs, while the Market Cap Weighted S&P 500 has not yet returned to all time highs. We're not far off, we're within a few percent of that. But it just highlights that there is some participation in the other sectors. And finally, election years tend to be strong. And so far this year has been no different. RBC's head of US equity strategy, Lori Calvasina, came out this week saying that her conviction that August 5 was the low for this pullback that we're in even if some choppiness seems likely when we return in September. So we tend to agree with that. We're still proceeding with some caution, however, as it's not uncommon to see pullbacks in September and in October of an election year. There's also been some precedence for some pullbacks in September and it bottoms in October. We have a chart showing that a lot of times pullbacks and corrections do end in the month of October. So again, we're not necessarily saying this has to happen, but we've had one 5% pullback and one 9% pullback this year. And finally, we just remain in the soft landing camp. The data continues to be mixed. And certainly, parts of the economy, consumers are getting a bit more stretched, but GDP growth remains strong. So at a minimum, we think we're in the soft landing camp, or at least a ways away from a potential recession in the US. So we'll continue to watch that. And the jobs numbers we think will continue to be front and center. Over the last 18 months call it inflation was the big data point that everybody was watching, but we think that'll turn to jobs. Jobs is a factor that can move very quickly. Once people start laying off, they see their neighbors and competitors doing the same, and that can move very quickly. So that's something we're conscious of. You started off the podcast saying that there wasn't a lot that happened in July. And clearly, we've had a very eventful past two weeks here. Suffice to say, though, I think the takeaway is-- we actually mentioned this in our last podcast-- that we were anticipating another correction or a bit of choppiness in front of us. We got it, but we didn't anticipate it to be significant in the sense that it would stay down for a long time. And I think that's exactly what we've got. And so we're still, as you mentioned, constructive for the rest of the year. Again, it doesn't mean it'll be a straight line, but it also doesn't mean that the returns that we've had so far this year need to be erased. You can trade sideways for a bit here, and that would be healthy and something that we would fully expect. And again, we've only had two corrections this year. So we're always cognizant of that, but generally, still positive. And so that's how we've positioned portfolios but again, focusing on high quality businesses. So we talked a lot about what just happened. But what else is coming up in the calendar, Graham? So later this week, we've got the Jackson Hole Economic Symposium where Fed Chair, Jerome Powell, is expected to speak. We don't have too high of expectations of what he will do other than try to calm the market after the last bit of volatility that we've seen. There's pretty locked-in expectations of September rate cuts. So we don't see anything to dissuade that thinking at this point. Canadian banks starts to report tomorrow. So TD reports on Thursday, and the rest of the peers will report their results next week. We remain underweight Canadian banks, but we are watchful of results as they come in, and really trying to see if provisions for credit losses are starting to peak. We can see a world in the next one to two quarters where we start to add back Canadian bank exposure. But for now, we maintain our underweight. And then perhaps the most important date circled on the calendar going forward is Nvidia's quarterly results, which is after the bell on August 28. There has been some news coming out already that their next ship will be slightly delayed. So the market has digested that, we think, for the most part. We'll learn more, obviously. But given what we heard from the other Mag 7 and AI spenders, Dan, nobody's really slowing down their AI spend. So the reason for that is Nvidia should likely benefit from that and continue to benefit from that. So that will be one to certainly get your popcorn ready for. And then lastly, the next jobs data will be on September 6. Again, that's the nonfarm payrolls. That's the one that just surprised to the downside a couple of weeks ago. So that'll be the next data point read on that one. Sounds great. Always so many things to follow in the markets. Thanks for listening, and stay tuned for the next episode. [AUDIO LOGO]

Hello, and welcome to At the Money. I'm Daniel Cheng. And I'm Graham Ingram. Today is Wednesday, July 17. Dan, a lot has happened since our last couple podcasts in June. Today, let's take a review of Q2 and year-to-date performance. And let's also talk about some of the things we're looking at in the second half of the year. So let's discuss first-half performance. The S&P 500 was up about 15% in the first half. We'll talk about the attribution of that and where those returns came from. But by all accounts, pretty strong start to the year. Themes that continued to play out included further anticipation around artificial intelligence and the amount of spending that mega-cap technology companies are making in the space right now. The NASDAQ composite, which is about 50% technology, was up 20% in the first half. Both these numbers are particularly impressive given 2023 returns, where S&P was up 26, and the NASDAQ was up 55. But don't forget, 2022, as we're aware, was a pretty challenging year for equities, and the index was down 18% S&P 500, and the NASDAQ was down 33%. Comparatively, the TSX was up 6% through the first half of the year. However, in Q2, it was essentially unchanged. So most of the gains on the TSX came in the month of March, and we kind of were at a standstill for most of Q2. Interestingly, there's been some pretty wide divergences in international markets. Specifically, countries like Japan continue to outperform. But when you look at [INAUDIBLE] returns, things like China, Shanghai, and Hang Seng have been posting pretty marginal returns, kind of in that 0% to 4% range. They've been challenged by some growth in the country. Yeah, if we look a bit deeper, and you dive into the performance attribution, I think what's important to note is you talked about the Canadian market underperforming the US. Earlier in the year, we had chatted about that kind of sector rotation, and energy was doing really well. If you look, you can see that energy has pulled back quite significantly. It's still up about 12% on the year, but I believe at one point it was up almost 30% as an index. So that's been a big driver of Canadian market returns. And when you think about the interest rate sectors, like REITs and utilities in Canada, they're still actually deeply negative on the year. So there is a wide divergence, as you talked about. And in the US, of course, there's kind of more of the same when you think about what's driving the market. Rough numbers-- you mentioned the S&P was up about 15 for the year. NVIDIA alone was 5% of that 15% return just because of its exceptionally strong rate of return year-to-date and the size of the weight of NVIDIA within the index. It was the top company in the S&P 500 at one point. Now it's number three behind Apple and Microsoft. If you include and broaden out to include the Magnificent Seven, which would be Apple, Microsoft, Google, Amazon, Meta, NVIDIA, and also Tesla, they were 10% of that 15% return in the first half of the year. So basically, 2/3 of the return. That leaves the other 493 companies only posting about a plus 5 for the first half of the year, which is not great when you think about the Magnificent Seven returns. But it's actually on an absolute basis, if this wasn't a tech AI type of parabolic year, would be a very respectable first-half return. And especially if you think about over the long term, the S&P 500 is compounded annually around that 9%, 10% rate of return a year. 5% mid-year is almost exactly where it should be. So it makes sense. You could say the same thing about the TSX as well. That 6% return year to date is total return. So price return, I believe, was only around 4%, and it's because our dividend yields are so much higher in Canada that you got that extra, call it, 1 and 1/2%, 2% on the total return. But the CAGR, over the last 20 years, I think for the Canadian market, is around 7.8% So still a lot of, I would say, movement to be had underneath. Yeah. And it seems like we've been talking about market breadth quite a bit, and for good reason. Certainly, through the first quarter, kind of in March, we did see some participation in other stocks and sectors in the market. However, that went the other way in the pullback of April. So what I mean by that is the market got a bit more narrow, and things that were leading continued to outperform. However, in the first part of July, we've seen some interesting moves, particularly in the mid-cap and small-cap space, putting together a handful of positive days, especially in the small-cap space, which has bounced 12% over the last three or four trading sessions. In fact, the trailing five days in the Russell 2000 small-cap index has been the biggest period of outperformance of small caps versus large caps in history going back to 1978. And really, what's going on there is the cooler inflation print at the end of last week has essentially fully priced in a rate cut by the Federal Reserve on September 18. And this has been a catalyst for small caps to play catchup. To give some context on small caps, the Russell 2000 market cap is just about 3 trillion. So even that's smaller than the market cap of Apple or Microsoft or NVIDIA. We continue to look for follow-through on this broadening trend or outperformance from equal weight mid-caps and small-caps in the balance of the year. Interestingly, yesterday, the S&P 500 equal weight broke out to a new all-time high. Today was a bit of a check-back date on the market. And those three indices as well outperformed on the downside. Obviously, we want market breadth to be catching up to the upside, which we expect will ultimately happen. But on these days where there's a bit of weakness in the markets, we are seeing some strength of equal weight small-cap and mid-cap. Right, Graham. We've been talking about market breadth, I think, all year. But rightly so. And if you look a bit deeper, again, we just started Q2 earnings season. The big banks reported on Friday last week, and this week you're starting to see earnings season continue in earnest. We've been watching the reports. So far, they've been a bit of a mixed bag, but positive reports have been rewarded quite well, especially on a day like today. I think that the trend is continuing, though. Mega-cap tech companies have been doing all of the heavy lifting when it comes on the earnings front, driving essentially all of the growth over the last four quarters. So Q2 is something we're going to be really be watching for an inflection point, where the other companies, again, to your market breath comment, are expected to start to show earnings growth as well. So communication services in the US, which is effectively tech, because that's where Google sits, tech. But health care and financials should be a positive contributor to earnings growth. So certainly something we'll be watching. We've gone through a period where more of the returns have actually been driven by multiple expansion. But the expectation is hopefully that baton gets passed to earnings growth, and that'll contribute more to share price appreciation as well. And so one of the risks that we are watching is if earnings report and guidance come in a bit light this quarter, that may be the catalyst for a bit of a pullback. And maybe it just shows that the market is kind of fully priced where it is right now. And as we move closer to rate cuts from the Federal reserve, people are starting to think about growth and value again. So let's talk about factor performance around rate cuts. Historically, after the first rate cut, value stocks tend to outperform growth over the next 1, 3, and 6 year-- 6-month periods. Small caps tend to see a bit more muted performance for the first three months after the rate cut, but really start to demonstrate outperformance over the next 6 to 12 month time frames. We've talked about this in prior podcasts, but the small cap stocks are the ones that are more interest rate sensitive. These are the companies that need to go to market and refinance debt, so they'll benefit from declining borrowing costs as rate cuts happen. So what does that mean for our portfolios? We try to strike a balance between growth and value. Our style, as we call it, is growth at a reasonable price. So we'll never swing 100% growth or 100% value, but we definitely will make some shifts at the margin. When you think about our overweight sectors, things like industrials and energy, these are very cheap on an earnings basis, and this represents the value side of our portfolios. The other way to think of value is the geographic split. You can think of US as more of the growth part of your portfolio, and Canada being a bit more resource-focused is the value. Makes sense. One of the other things I want to point out, too, is one of our core styles on the equity side of portfolios is dividends and dividend growers in particular, which have not been rewarded over the last, call it, two years, as everyone has been so focused on the zero dividend paying companies, we'll call them, the very high-growth types of businesses. But in a lower interest rate environment, I think dividend-paying stocks will continue to look more favorable. And rotation hopefully-- and you're starting to see it-- will move back into those sectors which align with some of the sectors you just highlighted, too. So lots to watch, and something we're hopeful for, but also expect to happen for the balance of the year. One thing I think is worth mentioning is the dramatic events that happened this weekend with presidential candidate Donald Trump. With the effective polling after that incident pushing, I think, his probabilities or statistics of winning the election to something like 60% or 70% now because of that, and that, conversely, has flowed, I think, into markets, where you saw a very strong positive reaction in markets earlier in the week, not including today. And a lot of that, I think, has to do with just certainty. You mention this a lot, Graham, but markets like certainty. And regardless of who's going to win, whether it's the Democrats or the Republicans, markets just want to in advance which party is going to be in power. And, therefore, you can kind of invest and know what their priorities are in terms of spending, tax cuts, and things like that. And you can actually position your investment portfolio somewhat according to what their platforms are. So, as of right now, certainly looks like the market is pricing in a Republican win. Lots to happen between now and the actual election, but, it's kind of moving that way. Just a few casual observations, Dan, on the market. When you think of things that are kind of canary in the coal mine, so to speak, there's a few factors and indices that we look at. And, to be honest, none of them are really flashing negative right now, which kind of supports the market strength we've seen. Specifically, credit spreads continue to be quite tight, as well as high-yield spreads. The high beta and low volatility factors-- high beta continues to move higher. Similarly, consumer discretionary relative to consumer staples-- so the things you want to buy versus the things you have to buy. Semiconductors, obviously has been an area of market strength. And we don't talk about cryptocurrencies much, but I would put it in the risk-on basket. All of these indicators aren't really showing any potential concern of the market right now. Now, that can change quickly. But so far, a lot of indicators are still pointing to strength in the market. So what else is coming up in the calendar, Dan? Obviously, we're in the heart of earnings season. The big one everyone's going to be watching, again, is clearly NVIDIA. That's late August, I believe-- August 28. However, I think something like 40% of NVIDIA's revenue actually comes from Amazon, Meta, Microsoft, and Google. So there will be some read-through from those companies over the next two weeks here. Big ones are central bank meetings, of course. The Bank of Canada will be meeting next week. Expectations are right now that they will probably cut again. And there still market is pricing in, I believe, two additional cuts after that as well. And the Fed is going to be following that. There's not expectations that they're going to cut at the July meeting. It could happen. But right now, with all of the events that have happened in the last week with the cooler inflation print, I think the probabilities for a September rate cut now have spiked up to almost 100%, which, as you've mentioned, is crazy to think about. The beginning of the year, market was pricing in six to seven cuts. Then we went to zero. We were talking about a hike for a minute there. And now we're back to probably one or two or maybe even three cuts this year. So if I were to wrap up what we're watching in the second half of the year, market breadth, of course. We've been talking about it all year. But it continues to be something that flip-flops quite a bit and something we want to see broaden out to really give us confidence, I think, that this market rally will continue. Two is obviously earnings. In the heart of earnings season here for Q2, we'll get a look at a lot of corporations and the health of the economy. Thirdly, interest rate cuts, particularly from the Fed, but also from the Bank of Canada, and if they're cutting because inflation is falling, and the economy is still quite strong, which it is right now. And the last thing I'd point out is, we've been expecting, I'll call it, another pullback or consolidation period. We had talked about it earlier in the year, and it happened in April very quickly. I think we wouldn't be surprised to see the market perhaps trade sideways in the next few months leading up to the election or have another pullback. You've always quoted this stat. But in an average year, you get three 5% pullbacks. We've only had one this year. And that doesn't negate the fact that the year can still finish off very strong. So it's not that it can't pull back and push higher. And that's still the path that we're looking for right now. Seems like the soft landing narrative is still the one to play out. So agreeing, Dan, we're still constructive of equities going forward. And any pullback would be met with anticipation of putting capital to work in stocks again. Sounds great. Always lots to watch for. Thanks for listening. [MUSIC PLAYING]

Welcome to At the Money. In part two, we will continue our discussion with Patrick McAllister, Vice President, Canadian Equities Portfolio Advisory Group. In this episode, we will be focusing on commodities and the US stock market. One of the other themes we've been talking about in podcasts and client letters is commodities. So obviously, that's going to relate to inflation, which has moderated, but maybe a bit sticky here. But it also has to do with global economic growth. What we've seen this week in the last couple of days is a couple of days of a growth scare, I'll call it. You get lower ISM numbers on Monday and weaker job numbers. But how do you think of commodities in terms of as a way to hedge against inflation or just as a broader global economic growth story? Yeah, I'd say each commodity has its own story, to be sure. I think the inflation hedge is an interesting one. I mean, we're not calling for rekindled inflation. That's not, I think, within the realm of our probable forecast outcomes from here. But if you are worried about inflation over the longer term, having an allocation to commodities makes a lot of sense because that's one of the things that tends to benefit and provide that offset. And if you're buying the Canadian market today, you've got roughly a 30% allocation to resources by virtue of the energy and materials sectors. As an outright growth play, it's tough, right? From an oil perspective, we're becoming more efficient. At the same time, emerging economies are becoming richer and consuming more. So it's hard to tell which one will have a bigger impact on the market in looking longer term, 3, 5, 7, 10 years time. Copper is an interesting one. I think it's still very much today a China story. They've moved to shore up their housing market. And actually, growth looks, despite a lot of pessimism, towards China. The growth estimates for this year and next are north of 5%. That's still pretty darn strong. But in terms of the electrification of everything, that's a story that will play out over the longer term and maybe needs to take a little bit of the baton from China and China housing and infrastructure development in particular. So each commodity has its own story within our portfolios that we manage and that we provide to the field. We don't tend to have a lot of metals exposure, but we have been leaning into the oil producers where again, the discipline that they've shown in codifying the cash returns to shareholders has been really encouraging from an investor perspective. You've got the oil sands majors returning 75% to 100% of their excess free cash flow to shareholders via dividends and buybacks. And that's a pretty compelling story. That makes sense. If I take that call and thesis and back it up a little bit. When you think about the relative attractiveness of the Canadian stock market relative to the US stock market, I know the Canadian market has been, quote unquote, "cheap" for a number of years, but arguably cheap for a reason. With this new view of what's happening in the different economies, How are you thinking about positioning and maybe overweighting or underweighting Canada versus the US in valuations outside of the Fab-4? Is that what they're called now? Yeah, we keep coming up with new acronyms and new names. And I can drop another one on you here in a second. I never like looking at valuations on, say, the TSX or the S&P 500 just at that level. We do it. It's in my chart pack, but that's just for convenience sake, right? We manage portfolios on a bottoms-up basis, meaning that we're stock pickers. So rather than looking at things from the bird's eye view, we're looking at things from the ground up. At that bird's eye view, yeah, the TSX is trading pretty much smack in line with its long-term average price-earnings ratio at about 15 times. The S&P 500 is north of 20 times relative to a long-term average closer to 17. Does that mean Canada is a better value relative to the US? Not necessarily. You look at the US market and whatever acronym you want to use, certainly that that's driving a lot of the pull upwards in terms of valuations. Outside of the top 10 mega-cap largest companies in the S&P 500, the PE for the rest of the S&P 490 is closer to about 16 or 17 times. So much more reasonably valued. But again, we like to dig into the sectors and dig into the companies. I think there's been a lot of-- I don't know if frustration is the right word, but I'm sure you probably feel it from clients where they look at the performance of their US holdings and wonder why they don't own more of that relative to Canada. And beyond the reason that we live here, we consume here, and we spend Canadian dollars, I just point out a couple things. One, I think Canadian equity returns are much maligned because as Canadians, we're typically looking at US and Canadian equity portfolios. We tend to have a lower allocation to international equities outside of North America. And the US is the toughest barometer in town. Go back to the nadir and the market in March 2009, coming out of a global financial crisis, that was the low in equity markets in North America. Canada actually outperformed for a brief stretch there. But since about 2010, it's been a story of dramatic US outperformance. But that's not just a Canada versus US story. That's a US versus the rest of the world and equity markets in many other jurisdictions. I think one of the things that Canada offers and constitutes 30% of our market is a pretty good collection of companies operating in oligopolistic industries. So said I owed you an acronym. And my colleague Richard Tan lent an acronym to this. And it's not the next Marvel movie, but rather the Ferocious-4 refers to four oligopolistic industries in Canada. Those would be the grocers, the telcos, the rails, and indeed, the banks. And together, those sectors, those industries make up about 30% of the TSX, actually a similar portion to what the Mag-7 makes up of the S&P 500 just coincidentally there. And these companies all benefit from scale. They all benefit from competitive moats to some degree. They all have pricing power. And if you compare the Canadian banks to the US banks, the Canadian rails to the US rails, do the same with the telcos, do the same with the grocers, over the long term, the Canadian companies have outperformed their US peers in terms of return on equity and share price performance over a long period of time. And it's not to say that we love all the companies in all these industries all the time, but suffice to say, they do make a good bedrock of [INAUDIBLE] portfolio. As followers of our work, another thing that we've really been leaning into on the Canadian equity side is the industrials sector. So if you look at our portfolios that we manage, we're roughly double the weight of the TSX in the industrials sector. So our flagship Canadian focus list would be 27.5% in industrials. The TSX would be roughly half that, maybe it's 13% or 14% or thereabouts. And why is that the case? Well, look, we just tend to find a lot of high-quality companies in that sector that we think can compound earnings for a very long period of time. We see companies that have good visibility, relatively simple business models, good competitive moats, pricing power, good management teams with a track record of operational discipline, but also capital allocation discipline, which is very, very important. So we find a great collection of those companies across engineering and construction companies, rail companies, equipment dealers, you name it. In industrials, there's quite a few good names to pick from there. So another reason to be long Canadian equities. We agree with the industrials theme, for sure. We've been talking about that for a while. When you look at just how much the economy is made up of government spending and business spending, despite what the consumer may or may not be doing, governments aren't spending less and probably won't be in the next couple of years either. So we agree with that theme for sure. Maybe let's turned to the US now. Obviously, top of mind for everybody is Artificial Intelligence, AI. Everybody's watching the videos online of how they're going to tutor their kids and all the great things that's going to come of this. But how are you thinking of this space in terms of investments? Do you want to be with chip makers or ancillary providers? How are you thinking of AI in general? I think on that front, particularly on the US side, the big get bigger, right? The mega-caps are spending a ton of money. They just discussed their capital investment intentions coincident with their most recent earnings announcements. And those big household names are spending each tens of billions of dollars in capital investments this year. And a lot of that, the line share is going towards AI. And so, they're going to move quick. One of the elements of their moat is scale and capital. And they're using that in a big, big way. I think what will be interesting to watch for those mega-caps is how they're actually able to generate a return on capital from here because they're spending an awful lot of money. And expectations are high. We referenced the valuations of these stocks average out in the 30 times price-to-earnings range. And so, there's fairly heady expectations for these stocks. So they are going to have to capitalize on this. And they are going to have to generate return on capital to generate the earnings growth that justifies those kinds share prices. But if you look across our Canadian and US portfolios, there's already good exposure there. You don't have to go looking for more speculative, more frothy, more volatile AI plays to get exposure. when I think about AI, I think about one of the themes that Jim Allworth, our chief strategist here at Dominion Securities, likes to talk about, and that is the grain of developed markets. We are getting older. In developed markets, demographics are skewing older and older. It's an aging workforce. People are aging out of the workforce. That's leading to labor market tightness. That's going to lead to wage gains. And failing some gains in productivity amongst those workers, that's going to stoke inflation, right? And artificial intelligence could well be that next general-purpose technology that unlocks those productivity gains. But it could take some, right? When you think about the PC, that came about in the 1970s. The internet came about in around the 1980s. And it was one decade or decades plus in the future before we saw the personal computer and the internet really reflect itself in higher productivity measures. And so, we might have to be similarly patient with AI. This could come about a little bit faster. But just given how much enthusiasm there is around this space, I would also just temper our enthusiasm on the timeline just a little bit there. I also like to think about not just who are the kind of picks and shovels, who's providing the chips, who is deploying the cloud capacity. But actually think about how AI can come to bear in different industries. And if you think about a bank, I'll name-check another one of my colleagues here. Sunny Singh wrote an interesting feature commentary that I'm sure the two of you would have seen, that looked at how GenAI could impact the Canadian banks or banks generally, right? When you think about AI and how that could be brought to bear to improve fraud detection, to improve credit underwriting decisions, to identify revenue opportunities, and to provide offers that are tailor-made for individual customers. When you think about all the back-office functions that could be made more efficient with AI, you're talking about levers on the revenue line and on the OpEx line that could really come to bear on profitability in the future. But again, I think it'll take some time to get there. I like that. The way that we've been thinking about artificial intelligence is along a similar type of line where maybe it's not the most obvious ones that everyone's looking at, but it's all these other businesses that are going to apply it and adopt it. And there's so much opportunity available. So the investable universe that's, quote unquote, described as "artificial intelligence" is much wider than I think most people think. So that's great. Obviously, it's a US election year. It's been fairly quiet thus far, but as we get closer, I'm sure the news flow is going to ramp up significantly. And usually, everybody likes to draw analogies of what's going to happen to the market in an election year and who wins. Do you have thoughts on that? Well, yeah. I mean, look, I think there's almost a coin flip in terms of probabilities right now, which, just by definition, creates some uncertainty, right, in terms of what the outcome could be. Both candidates will articulate different platforms between now and November. That might make it more apparent in terms of who the relative winners and losers at an industry level might be under either candidate. But as long as the probabilities remain as close as they are today at essentially a coin flip, it's hard to think too hard about that at this juncture. I think the thing I would remind our listeners is the Fed and Fed policy and the rate of economic growth are going to be much bigger drivers for your portfolio than who is ultimately sitting in the Oval Office in January of 2025. I think also it gets missed sometimes that earnings growth really is a big driver. So looking at ROEs and EPS growth, people often wonder when the economy is so mixed or there's pockets of weakness, What's driving this market? And we talked about that on our last podcast. But if we think about even the technology space now versus the.com, we would argue there's actually earnings that justify some of this interest as well. Do you agree? Yeah, I would agree. You see, there's charts out there that look at the capitalization of the top 10 stocks relative to the overall market. And it's not at 2000-era levels, but it's on that trajectory. And that gives people that can remember that far back a little bit of heartache and heartburn and indigestion, to be sure. But I think the point that you made is exactly correct. I think the fundamentals of these businesses are much, much stronger than maybe some of the tech giants from the 2000 era that ended up in a fairly severe bear market. That's great. Well, we appreciate you taking the time. It was a wide-ranging discussion. We look forward to the next one. Thanks for listening. [AUDIO LOGO]

Hello, and welcome to At the Money. I'm Daniel Cheng. And I'm Graham Ingram. Today is Wednesday, June 5. We're happy to have a guest speaker with us today, Dan-- Patrick McAllister, VP of Canadian Equities Portfolio Advisory Group from RBC. Thanks for taking the time out of your day to join us, Patrick, all the way from Toronto. We really appreciate it. Maybe you could tell our listeners just a bit about your role within RBC and the Portfolio Advisory Group. Yeah. Thanks, Dan, Graham. Thanks for having me. Yeah, I think the best way to sum up the Portfolio Advisory Group is almost just that it's an advisory group for investment advisors at RBC Dominion Securities. And we're there to provide all manner of investment management related advice to those advisors. We provide advice on asset allocation, portfolio construction, single line security selection, stock recommendations-- you name it. Investment management related-- hopefully, we're providing you guys top of class service on that front. Sounds good. And for our listeners out there, obviously, you would recognize their names from authoring the Global Insight Weekly and the Global Insight Monthly, and a lot of the commentary that we do publish and send out on our weekly email as well. So with that, let's get into it. We've got some topics to talk about today. Obviously, today's Bank of Canada rate cut day. We'll talk about that. But Patrick, maybe why don't we start with just the economy and maybe recession risks that we're seeing right now. Yeah, absolutely. I think that's the best place to start. And if we were having this conversation a year ago, we really would have been leaning into the recession risk narrative. Whereas fast forward today, in June, 2024, the market seems to really be subscribing to the soft landing narrative. Certainly, the economy has proven to be much, much more resilient than expected, and chief and foremost amongst that is the US economy. But the rest of the economy-- or the rest of the global economy has kind of limped along, Canada included. But the US has really been the exceptional story on this front. So what has supported the US economy, and by extension, global economies, and kind of offset this recession risk that we would have seen a year ago? Well, the consumer has been incredibly resilient. And I think that's one thing that we maybe didn't appreciate enough, was just how long the consumer could remain resilient. I think the best place to start is maybe just thinking about where we were in 2020 and 2021-- very quick recession. And that was met by extraordinary fiscal and monetary stimulus. And it's a very rare recession where you actually see incomes and savings rise, right? We weren't spending money because we couldn't. In many instances, we were locked down and couldn't spend money on goods or services the way we necessarily would have. I guess goods got a bit of a demand stoke, but services certainly lagged. We also saw incomes rise on the generosity of fiscal support. So that was a fairly unusual, unique outcome in a recession. And the savings backdrop, that savings cushion, the excess income that was accumulated during that period really protected consumers for much longer than we would have anticipated. Certainly, there are consumers out there on the low end that are suffering, that have maybe spent through their pandemic era savings. But certainly, the consumer has been resilient. The labor backdrop has likewise been resilient. It's softening now, but it's softening from a place of probably extraordinary strength, right? We had many, many more jobs available out there than we actually had people to fill them. And so we saw a really incredible wage growth, much stronger wage growth for many different jobs, much stronger than we've seen in many years. And so that certainly buoyed incomes. Thankfully, the labor market has come off the boil. We're seeing wage growth moderate. But it's moderating at a healthy level that in many instances is exceeding inflation, also helping the consumer. So that's certainly helped. I mentioned the fiscal spending, that continues. The US is kind of the prime culprit. We can maybe talk about that later. But there's other governments as well, Canada included, that are spending an inordinate amount, spending much more than they're taking in terms of tax receipts. And so that's also been a support to the economy. And so whereas we saw a lot of recessionary coincident indicators perhaps a year ago, things actually look a lot different today. Our colleagues at Global Asset Management, they monitor a range of indicators to suggest, where is the US economy in particular in its business cycle? Is it early, mid, late stage, end of cycle, or indeed, into recession? And just three months ago, the preponderance of those indicators that they monitor-- and it's a long list. It's about 20 indicators-- credit spreads, the jobs market, the buoyancy of equity markets, time in the current expansion. It's a long list. But the preponderance of those indicators were pointing towards late cycle, end of cycle, or recession. Today, the preponderance of those indicators, the economy is acting much more like it's in the mid to late cycle, suggesting that this expansion could have further room to run. And so I just referenced Global Asset Management. We've got a great resource there, a partner there that I'm sure you two are very familiar with-- but Eric Lascelles, Chief Economist at RBC Global Asset Management. Today, he ascribes a 65% probability of a soft landing. And I'll just quickly describe what a soft landing means. It's moderate, but not gangbusters growth. It's not too hot, not too cold, but perhaps just subdued enough that it allows the disinflation narrative to continue to play out, and eventually allows the Fed to cut rates. He puts a 65% probability on that soft landing outcome. I always like to add, the fact that we're putting a probability and a number on it implies some false precision, but that's just the way the numbers shake out in his model. Now, the flip side of that is if we see a 65% probability of a soft landing today, the flip side is 35% probability that we still see a recession. And that's certainly higher than usual. And I think that's to be respected. Within RBC Portfolio Advisory Group, we also look at a range of forward-looking indicators to judge whether recession is coming down the line. The yield curve inversion, which has been inverted for roughly two years now, that's one that we put a lot of stock into. Another one which is flashing yellow right now, but may actually tip into flashing red, is the level of nominal GDP growth of the US economy relative to the Fed funds rate. When the nominal rate of GDP growth falls below the Fed funds rate, that's usually a recessionary indicator as well. And we're very close to that tipping point. I choose those two signals. There are others that we monitor, but I think I choose those two because they both relate to the level of short-term interest rates. And I think that's what's most relatable probably to listeners out there, is that interest rates are still quite a lot higher than we've become accustomed to since the global financial crisis. And that has yet to fully have its impact on the economy, right? When the Fed and other central banks started raising rates, they talked about, raising rates, rising rates, they impact the economy with a long and variable lag. And that long and variable lag can vary, depending on what business you're in, what your balance sheet looks like. It can vary based on geography as well. In Canada, we would consider ourselves to be much more interest rate-sensitive than the US economy. And there's two main reasons to that. One is that the housing is a much bigger piece or component of our overall economic output in Canada. And housing is very sensitive to interest rates. And then secondarily, the nature of our mortgage market is different, right? And so while US consumers have probably been shielded for longer from the impact of higher rates because they predominantly sign on to 30-year mortgages, here, we know in Canada, the most popular form of mortgage is a five-year term. And so that means that as those mortgages mature and refinance at higher rates, that impact of higher rates comes home to roost for borrowers. Now, even here in Canada, with that shorter mortgage maturity, only about 50% of folks that have a mortgage have actually refinanced or felt the impact of higher rates. So there's much more to come. And so I think that gives us some reason to be wary that the impact of higher rates has yet to be fully felt in the economy. Great segue and introduction to what's going on. I know a lot of people, and probably the general view, is that the Canadian economy has been weaker than the US, and that also the rate sensitivity you mentioned probably drove the Bank of Canada to do what it did today, which was cut rates 25 basis points. The market, I believe, is pricing in two to three more rate cuts this year. Is that reasonable? And we talked about this last time, but policy divergence between Canada and the US in terms of interest rate policy, how far can that go? And then, maybe, what are your thoughts on implications of this for asset allocation in terms of investment portfolios? Yeah, absolutely. So I think it was not very surprising that the Bank of Canada went today and cut by 25 basis points. If they weren't going to do it today, then it was very highly likely that they would do it in July. So the ingredients were there. As you mentioned, the Canadian economy has not enjoyed as robust growth as the US economy has. We just got GDP numbers, I think it was last Friday, for Q1 here in Canada. And the economy expanded at an annualized rate of 1.7%. It's not terrible, but it's below potential. It's certainly not great. And we've seen the disinflation narrative here in Canada, thankfully, on the right track. We had inflation of 3.4% in December. The April reading was 2.7%. We're seeing some additional signs of softening in the labor market. The unemployment rate has been ticking up. And so check, check, check. The ingredients were there for the Bank of Canada to cut rates today. Our colleagues at RBC Economics believe that there will be another three cuts to come in consecutive meetings. And I think looking at the statement accompanying today's announcement, there wasn't really anything that would dissuade me from thinking that that's correct. Certainly, they're saying the right things about continuing to interpret the data month to month. But they certainly left the door open that this is the first of several cuts coming down the pipeline here. And so RBC Economics is expecting three more cuts for the balance of this year for a total of 425 basis point rate cuts in 2024. With respect to the fed, their expectation is the Fed kind of waits it out. The futures market-- you can imply from asset prices in the futures market what the market is assuming with respect to the fed. I think there's some indication that they could go as early as September. If they don't go in September, they probably wait until December because they're conscious of not playing a role in and around the US election in November. And so RBC Economics thinks that they wait it out and they indeed cut in December. Futures market are pricing in probably one or two Fed futures or Fed rate cuts in 2024 for the balance of this year. And so where does that leave us? So RBC Economics is expecting a little bit more rate cuts from the Bank of Canada than is implied by futures-- futures would be implying another two rate cuts-- and expecting a little bit less cutting from the Fed. And so that gets to, Dan, the policy divergence that you were talking about. If we get 100 basis points of cuts from Canada, 25 from the US, we start to look a little bit out of sync, but not to a significant degree. It's not to a great degree relative to what's already baked into asset prices. If that's the way it plays out, maybe a little bit of directional softness on the Canadian dollar relative to the US dollar. But not a disordinate amount, I wouldn't think. It's providing some relief. So that's great. I think we're going to talk about the Canadian banks a little bit later. But when you think about that indebted Canadian consumer and that interest rate sensitivity, this helps. But make no mistake, Canadian household debt relative to incomes is not quite at peak levels, but it's not far off of it. And we've been trending near peak levels since about 2017. For a long time, it didn't matter because rates were quite low, next to nothing in the wake of the pandemic. But now rates are higher. And so even if they're coming down, they're higher than they have been historically. And that's going to have an impact on debt servicing costs, which, for the average Canadian relative to income, again, are going to continue to march higher, even if the policy rates are moving in the other direction. And again, that goes back to the earlier comment on just mortgage refinancings, right? I'll throw my personal situation out there. I refinanced my mortgage last in summer of 2020. When the time comes to refinance in 2025, it won't matter that the policy rate is lower. My payments will be higher based on the five-year rate at that time. If I'm paying the five-year rate that we see in the market today, I'm probably looking at a payment that's going up about 30%. So again, even though the policy rate is coming down, that impact of higher rates is still winding its way through the Canadian economy. That's great insight. Thanks, Patrick. Maybe let's drill down on some of that in thinking about portfolios. We've been largely avoiding interest rate risk when possible. So on bond portfolios, keeping shorter duration. Avoiding some sectors that are more impacted by higher rates. Now that we're embarking on a rate-cutting cycle, how do you think about positioning? Maybe we'll start with Canadian banks as well. In theory, lower rates would be better for banks that borrow at the short end and lend at the long end. But historically you need to wait to see loan loss provisions peak before you dip your toe in the water of Canadian banks again. Do you think that's the case here, or how are you thinking of that space? Yeah, the Canadian banks, we are underweight relative to the TSX. And when I say we are underweight, we manage portfolios and we provide model portfolios to the field. And the TSX is close to about 20% allocated or weighted towards the Canadian banks. And we're a few percentage points south of that marker. And we recognize that valuations are discounted and remain discounted relative to historical levels. There is a number of headwinds suffered by the banks in 2023. We were hoping and thinking that some of them might start to flip as 2024 played out. I'd say expense growth, they're starting to get that under control. That was a real thorn in their side in 2023. For virtually all the banks, you had expenses growing much faster than revenues. But the big one out there is credit losses. And I don't necessarily think that we see line of sight to that necessarily peaking necessarily in the next couple of quarters. And your rule of thumb there, where you'd really want to step into the Canadian banks around the time that credit losses are peaking, I think that still holds. There's been some accounting changes that we probably won't want to bore listeners with. But I think that line of thinking still holds. But with only 50% of mortgages outstanding having refinanced at higher rates, there's a lot more headwind to come. Certainly, if rates are lower by the time those '25 and 2026 mortgages are refinanced, that'll help because a 30% payment shock maybe becomes 20%. Maybe it becomes something less than 20%. That's a lot more manageable. But certainly, we're cognizant of the 2025-2026 maturities for mortgages in Canada being a little bit of the pig and the python, right? You think about those being five-year terms. So those were mortgages originated in 2020 and 2021. So think about rock bottom interest rates-- almost free money at certain points-- against pretty high housing prices. And that bill is coming due in 2025, 2026. There are offsets. I don't want to be totally doom and gloom, right? Incomes have risen during that intervening five-year time. Mortgage borrowers at that time were stress tested at higher rates at origination. That certainly helps with the servicing of that debt and making sure that that's a good credit underwriting decision. We also have greater equity in those homes because, by and large, home prices are a little bit higher depending on the market. And so that certainly helps. But we don't see a calamity there. But it's a stiff headwind, right? And so if you're spending $0.20 to $0.30 on the dollar more on your mortgage payments, that's dollars that can't go elsewhere. And at the very least, that's a headwind to consumer discretionary purchases for Canadian consumers. Thanks for listening to part one of our discussion with Patrick McAllister. Join us next week for part two, where we'll discuss commodities and the US stock market. [AUDIO LOGO]

Hello and welcome to At The Money. I'm Daniel Cheng. I'm Graham Ingram. Today is Thursday, May 23. Today's episode, we're going to talk about what's driving stocks higher? As well as revisiting rate cut expectations. Sounds great. It's been a few weeks since our last podcast, though. What's happened since? I feel like there's been a whole bunch of things. So Dan, we did see a normal pullback in the month of April. On the S&P 500, we've got about a 5 and 1/2% pullback. On the TSX, it was only about 3%. Year to date, we were trailing us indices, so there was a little bit less to give up. Also, the commodity strength of the TSX helped on that sell off. But when you look at other markets like the NASDAQ, the NASDAQ was down 8% peak to trough in April, as well, the small cap Russell 2000 index was down about 11%. So depending on which market you're in, there were varying degrees of normal pullbacks, I would call them. Very interesting. But I think, we had been expecting that pullback to come. And as we also expected, it was fairly short lived. And we're back at all time highs in the market. In particular, yesterday was the biggest day in earnings. NVIDIA met the hurdle. And so that has, I think, maybe opened up the door for more upside, you think? What's driving the markets higher? Yeah, let's talk about that, Dan. For starters, there's no doubt that inflation coming off previous highs. So in the US, it got to about 9%. In Canada, highs of 8%. That's come down in the order of to 3%, where we're at right now. And that's been a huge factor in moving stock prices higher off their October lows. In addition to that, the pause and rate hiking cycle by both the Federal Reserve and the Bank of Canada in September of 2023 was well-received by the markets. We've got a chart later in the deck that shows how both stocks and bonds act following the last rate hike and once rate cuts begin. Through the period, however, there's been significant fear of recession and sticky inflation. In a way, Dan, It's been a bit of an unloved bull market, but this is often a recipe for strength in the market itself. And the way I view it is sufficient skepticism and watching for downside surprises often means that expectations have been reset. So that can be a positive thing for the market as well. But the point we're going to make on this slide here is, you see the chart on the left, corporate profitability has really been trending higher for the last two years. So corporate margins have been strong and were strong in Q1 that were just reported as well. And that drives earnings estimates. So the chart in the middle, you can see really off the October 2022 lows earnings estimates on a forward 12 month basis have constantly being revised higher. And again, that was the case in Q1 as well. So earnings forecasts are often one of the most highly correlated factors to stock prices. And in our minds, this expectation of improving earnings per share has been justification for the equity rally. The last chart you see on the right is a component of what's driving the market. So year to date, the S&P is up 11. Roughly half of that is come by way of earnings growth. So the earnings revisions we just talked about. The other half has come from multiple growths. So expectations for rate cuts eventually and lower rates is generally a sign of a lower discount rate as well. So you can pay a higher multiple for stocks. So when you combine all that together, there is sufficient justification for this equity rally. And we think that can continue. Let's get it. It sounds like the market now is healthier in a sense than it was previously, where it was mostly just multiple driven. Now you've got earnings actually matching up. And we just finished earnings season, basically, as we mentioned earlier. NVIDIA was kind of the bookmark end to that. And it was-- which is the story of the last year and a bit is better than feared. Think every time, it's been earnings, or inflation, or whatever key data point is everyone's expected the worse things have come in a little bit better and the market's able to rally through that. So it's positive to see. And valuations, of course, are something we're keeping an eye on. And we haven't even talked about how maybe interest rates would affect this, too. The pushback, real quick, down on the earnings story is a lot of that's being driven by technology, which is certainly the case. If you look at technology, NVIDIA, yesterday, guiding higher. It is the biggest driver of earnings revisions and earnings forecasts as well. But if you look out into Q4 of 2024, the expectations for earnings increases is a bit more balanced. So what I mean by that is you still get strong technology earnings, but there's a good chance that you get earnings revisions and participation from industrial companies, health care, financials, some other sectors of the market. So that would be in line with our broadening market thesis of participation. And we look to see that play out. Why don't we revisit rate cut expectations? Because this is probably the other biggest driver of markets, for sure, is just the path of interest rates both in Canada and the US. So we've been talking about interest rate expectations since the end of last year. As most of you are aware, coming into this year, there was six or even seven interest rate forecast cuts in the bond market. We thought that was a bit aggressive at the time. And that certainly tended to play out. Today, if you fast forward, where on the back of a couple hotter than expected inflation numbers earlier this year, there was only two rate cut expectations by the Federal Reserve. And that's highlighted by the line here in orange. So really a repricing of rate expectations. There's even been some chatter about another rate hike. We don't agree with that view. It probably-- the pendulum has swung a little bit too far in terms of where we are in the market. Inflation has proven to be sticky, but there'll be some lagging things like shelter and housing that eventually will come down, too. So we're still in the camp of maybe two rate cuts, just like the bond market is pricing in. And that would be supportive of markets as long as the rate cuts are on the back of falling inflation and not significantly deteriorating economic expectations. I think in Canada, as we know, the rate cut expectations have been much higher because of our significantly weaker economy and arguably, much more interest rate-sensitive economy as well when you think about our mortgage market here and the way that data is structured and even debt levels. The probability of a Bank of Canada rate cut in the next two weeks here in June is quite high. And I think expectations for two or three cuts this year are still in place. And that would make sense for what's happening in the Canadian economy versus the US economy. You see the chart on the right, the tick down and expectations was the April jobs number in Canada that came in much better than expected. Since then, we've seen April Canada CPI come in lower than expected. So the current odds of rate cut expectation in Canada is only about-- sorry, it has moved higher to about 60% And that's coming up on June 5. So the economic data has certainly given cover to the DLC to start the rate cut cycle. And a lot of questions that we get from people are, well, how much can the Bank of Canada diverge from the Fed? And there has been precedent in the past of the Bank of Canada moving in a different direction than the Fed and significantly. So the last most significant time would have been in 1995, actually. The Bank of Canada actually raised rates quite substantially and faster than the Fed did. And then they cut quite sharply versus the Fed actually holding rates. So it's not unprecedented. And I think, this year and this cycle could certainly be very similar to that period of time just in terms of trajectory for interest rates. So again, it's not uncommon for that to happen. So we would not be surprised to see the Bank of Canada, I think, cut first and maybe more than the Fed this year, who maybe only cuts once or not even. We'll see what happens. And of course, the next question people will ask is, well, what's the implication to the Canadian dollar relative to the US? And that's what you're looking at here. This is a great chart. I think it goes all the way back to 1970, basically, showing the range of where the Canadian US dollar has been. And we're at the lower end of where we've been, would you say? Yeah. So the takeaway looks to be that we're about one standard deviation below long term averages on the Canadian dollar, which are volatile over time. But using that and technical analysis work, if we hold the 72 cent level, we're certainly in a trading range right now from 72 to 75, call it. But don't forget that through COVID, the US dollar was the world's reserve currency and flight to safety, so it's not impossible to see an unwind of that. And on the back of that, stronger Canadian dollar. As we all know, the Canadian dollar is very tied to commodity strength as well. So depending on your outlook for that, we've talked about our outlook for commodities as a good inflation hedge. And the supply and demand factors of some of these commodities are quite bullish. So that would be positive for Canadian dollar as well. Yeah. So I think directionally, the way we're thinking about Canadian US dollar is there's probably a cap on the Canadian dollar for sure. And certainly, potentially, some more weakness on the Canadian dollar relative to the us, but not so dramatic that we get back to maybe the late '90, early 2000 levels. Of course, data dependent, but, that's not our expectation right now. So from a portfolio perspective, we are keeping our unhedged US dollar exposure because we like having that as a Canadian investor anyways. So that's the outlook on, on the Canadian US dollar in relation to interest rates. But what about bonds? So it's been a challenging, I would say, few years for bonds 2023. Of course, 2022 was the worst year for bonds, essentially, in history. And bonds, at one point, were down anywhere between 12% and even 20%-plus on really long term, long duration bonds, with yields holding up and higher year to date in 2024. Bonds are actually negative year to date, which is surprising to some people. And also in relation to our portfolios, while we've continued to be very short duration, we held on to our floating rate exposure, which has worked out very well. And as we mentioned earlier, we weren't anticipating those interest rates cuts to come, which is why we kept that bond positioning. But what does this chart here show? So it's a fair question. Why own bonds at all? Policy rates effectively went from 0% to 5% through this last rate hiking cycle. But where that leaves us is starting yields on bonds are quite attractive. So any time in history where Canadian bonds of investment grade were more than 3%, the next three year period of returns was always positive. So the chart on the left shows just your starting yield is often a big determinant factor of trailing subsequent yields. So if you're starting with a government bond or a corporate bond of four or five or 6%, that's going to be a really big component of your return in the following years. Most times, interest rates aren't moving as much as they are right now. But that gives you a margin of safety for if yields do tick a little bit higher from here, the coupon you're going to earn is still in excess of that. And I do believe, bonds work as a portfolio diversifier. Of course, when yields were very low, it didn't work as well. But now, with starting yields, the highest they've been since basically pre-financial crisis, it's a very different proposition when we're looking ahead. And then if you layer on top of that potential interest rate cuts where that could give you capital appreciation on your bond to, you can expect, realistically, probably, a mid high single digit return-- total return from owning bonds looking out two to three years. And to us, that's, I think, a pretty good asset class to be invested in as a core stable part of the portfolio. The chat on the right here shows bond performance after the last rate hike. So needless to say, eventually, that's followed by rate cuts. But generally, it's viewed positively by bonds and the market that eventually, there'll be rate cuts. The rough rule of thumb is you can use your duration to gauge how much is my bond price going to move. So I'll give you an example. If you own a bond with a duration of five years and you get a 1% cut in interest rates, you will expect that bond price to go higher by 5% And that's in addition to the starting yields we just talked about. So there's many scenarios where if you get a 1% or 2% interest rate cut in the coming years, you'll get bond price appreciation on top of that pretty attractive starting yield. That could take you into the high single digits or even low double digit type returns for bonds. The question is, after that point, what do you do with bonds, Dan? You probably want to start looking at your asset allocation. And one area that Graham and I and the team have been spending a lot of time on is in the alternative world and how we can incorporate alternatives into portfolios. And that's a broad term, but it does include a lot of things like private credit, private equity, things like market neutral or merger arbitrage. And these are generally uncorrelated asset classes to both the stock and the bond market. And this is probably an interesting time to start looking at adding those vehicles into our portfolios. Would you agree? I would agree. And so the takeaway is I don't think the thesis for bonds have changed, maybe just the timing has been pushed out as we reprice rate cut expectations. But if and when that does happen, we'll be looking to make the appropriate asset allocation. Bonds get down to a very low single digit returns, then we feel there's probably asset allocation decisions to be made at that point. Before we wrap it up here, let's take a look at of how the markets have been performing year to date and give an update on what sectors are moving and why. April was really interesting, Dan. There were some sectors that moved higher despite the broad market pulling back. Two of those were consumer staples, so those tend to be defensive people, a place to hide when the market's falling a little bit. The other was utilities, which is interesting because rates really haven't fallen that much. The story on utilities has been a second derivative play on AI and computing. The power generation needed to support all these data centers and cloud computing. So there's been a lot read through on the utility space on the back of that, which is interesting. More recently, we've seen the materials sector, especially in Canada. Renewed strength there. And so that's on the back of gold prices breaking out to new highs, copper prices breaking out to above $5 a pound to new 52 week highs, silver and some other base metals as well. But that's really driven performance of our resource base stocks as well. Yeah. And when you look at this, when you look at the US sectors and what's driving it, certainly, it's still all about technology and the generative theme. And you know, we think that continues. But what you also see is, as Graham just mentioned is, utilities, financials, industrials, energy are also putting up very, very respectable performance numbers. And then in Canada, I think the biggest takeaway, too, is energy, as a sector, being top performer has been a significant shift from last year. But just the absolute return number is extremely compelling when you look at it compared to the tech sector in the US. And that's the aggregate. If I talk about some individual names here, some that are constituents of our portfolios like Arc or Suncor or CNQ. Those individual names are up 30% year to date in 2024. And you're getting a very healthy dividend yield on top of that. So some very attractive opportunities outside of the tech sector that are just maybe being overlooked right now. So my takeaway from this is, perhaps, stock picking is more meaningful, again, in the Canadian market, certainly. And you're able to add some alpha and value by looking at that, and particularly, in your sector tilts and where you're positioning. I think it makes sense to start thinking about that as we look ahead to the balance of the year. As we look ahead to our next podcast in June, what do we have on the docket in terms of data? In the calendar, Dan, we've got Canadian bank earnings. So TD actually reported today. It was a slight beat. But the rest of the Canadian banks will be following next week. May 31 is the US PCE inflation data. So all eyes are on CPI and PCE numbers to check in on inflation in progress there. And then the big one we talked about, Dan, is the Bank of Canada meeting on June 5. Sounds good. And just a quick plug for our next podcast, we are going to have a special guest, Patrick McAllister. He's actually the chair and a member of the Portfolio Advisory Group here at RBC. And he leads our Canadian and US equity teams. So we're going to dive into some sectors, talk about probably, AI as a theme in particular, things like commodities. And it should be a great discussion, just getting a bit more granular. So thanks for listening. Stay tuned for the next one. [MUSIC PLAYING]

Hello, and welcome to At the Money. I'm Daniel Cheng. And I'm Graham Ingram. We're with the Becker and Cheng Wealth Group RBC Dominion Securities. Today is Thursday, April 11. Today's episode we're going to talk about investing at all-time highs, the average length of bull markets, commodities, and sector rotations that we're seeing in the market. But first, why don't we circle back to last podcast episode and the topics that we discussed. Great idea. So last time we actually chatted about, are we due for a pullback? And we're sitting here, market are closed up today. But yesterday after that hot inflation print, we actually saw markets check back fairly significantly, but only about 2% this week, I think, which is really minor actually in comparison to historical corrections. I think the average, you pointed out last time, was like 3, 5% pullbacks in a calendar year would be very normal. So this is still early and very minor, but I think we were and have been still expecting a modest correction. The other topic we talked about last month, Dan, was the divergence within the Magnificent 7. So starting to see some of the technology names consolidate, names like NVIDIA, Google, some of which have come back. And we've seen pretty short-lived sell offs in some of the names. For example, NVIDIA was down in the last couple of days. On a day like today, investors buy it back hoping to time a bit of a pullback and add names that they probably missed out on beforehand. No, that makes sense. And the other thing we talked a lot about was just the broadening out of terms of market participation or breadth of the market, which is other sectors starting to move with the market. And we're going to get into more of that today. So why don't we do that? One of the questions we get a lot of recently is with markets pushing up to all-time highs, everyone's always like, well, don't really want to invest right now because the market's at an all time high. What do you think about that? Yeah, it's a very valid question and certainly market psychology-- you're always looking for a discount or very hesitant to buy new highs, but the numbers actually show otherwise. So let's go through that, Dan. Just for reference, January 19 of 2024 was the first all-time high in over a year. So obviously, an extended period of not having new highs. Since then, we've set about 22 new all-time highs in 2024. Although that sounds like a lot, it's actually not unusual. And so here's the numbers subsequent to new highs. If you were to invest at all-time highs when your returns are about 9.43%, if you look at that one-year return on any other day since 1970, it's actually only 9.13%. Three and five-year numbers are similar, in that returns following all-time highs are actually slightly more positive than the average return for the period. That was interesting. So I think the takeaway obviously is an all-time high actually typically portends additional highs or more gains in the market. Obviously not a straight line, but if you're looking out beyond 12 months, the statistics actually suggest a very high probability of more gains. And that makes sense to me, Dan. Markets trend in-- there's momentum factor behind that as well, both of which we've seen over the last year. If we look at investing at all-time highs and take that to the next level, Dan, how long is an average bull market cycle? Question. So that's another thing to keep in perspective is-- so if we use October, call it, 2022 as the most recent market low, we're about 17 months into this new bull market. The chart here actually shows that the median length of what we call a bull market or a strong uprising market is just over 30 months or about 2 and 1/2 years. And so no guarantees, but when you're looking out, call it, again, more than 12, 24 months from now, it suggests that you could still have further gains from here if we are, indeed, in a new cyclical bull market. Yeah, there's precedences of having even longer bull markets than that. So as you can see on the chart from Fidelity Investment Management Research, bull markets can be beyond three years, 40 months plus. So it would not be uncommon to see an extended run even beyond the 18 months that we're at right now. On the flip side, there have been bull markets that have been short and sweet, stopping at that 18 month mark. But those instances are few and far between, with, again, the median coming in at 30, 31 months, or 2 and 1/2 years. I know you're a baseball fan. So if I were to use a sports analogy, maybe we're fourth or fifth inning of this bull market. Yeah, I would say so. Just using those numbers, if we're 17 months into this new cycle, if you will, maybe 30, 31 is the average. That puts you in the fifth inning. And the analogy I'll draw, too, is the starting pitcher is starting to get a little bit tired and the bullpen is warming up. And so maybe it's time to pass the baton to the next leader in the market. That's a great segue. I think one of the things we talked a lot about last time was just the market breadth again other parts of the market starting to contribute. And so in particular, I think one of the really interesting things that's happened in the last particularly three or four weeks is what commodities have done. And for all of us here in Canada, oil and gas in particular-- actually, maybe not so much natural gas, but crude oil in particular as well. So what are we looking at here? So certainly we've seen commodities uptick as of late. There's been a few drivers for that. So yesterday, we saw a hotter than expected inflation data for US CPI. On the back of that, basically rate cut expectations are being priced out of the market. Historically, inflation and-- commodities are a good inflation hedge and they tend to perform well when the US dollar is weaker and inflation is higher. It's only a few months removed, a few years removed, but probably not many people remember that commodities were the number one asset class in both 2021 and 2022. One of the things that's been going on with the energy sector in particular is that commodity prices, obviously, oil prices in particular I'll talk about are pushing up on that 85, $90 a barrel range. That's very, very lucrative, I would say, for many of the producers in Canada in particular because of what they've done in the last few years where they've paid down their debt so significantly. Cash flows are very strong, and it's a very different type of business than it was even just a few years ago. And so this is something that benefits the Canadian stock market in particular, which is nearly-- call it over 20% energy-weighted versus something like the S&P 500 where it's only about, what, 4 and 1/2 or 5% energy? If you can see here is-- I think this might be surprising to many people is that energy in Canada, actually, and the US has quietly become one of the top performing sectors in 2024. So last year was all about the Mag 7 and technology. Energy was actually one of the worst performing sectors. This year here we are, call it four months in, not quite into the year, and energy is now one of the top performing sectors. That's really impressive, Dan, because we've actually seen outflows from the energy space. So despite all that, the energy shares are still performing quite well. So what would be the driver of that? In my mind, it's a few things. Obviously, strength in crude oil prices, as you just alluded to, Dan. Refiners are doing quite well. So gasoline product prices are quite strong. Jet fuel-- everybody's still hopping on a plane these days. And then quite honestly, the continued buybacks from companies in the energy sector has been a driver to. A lot of companies have met their debt targets or will be in the next couple quarters. Once that happens, they're dedicated free cash flow back to shareholder return in the form of both dividend growth but share buybacks. So that's really helped to drive shares as well. That makes perfect sense. This is one of our core investment tenants in the equity side at least is we favor dividend-paying companies, but more importantly actually dividend-growing companies. And energy fits that description very, very well right now. So related to that, we did go overweight energy earlier this year, pretty close to the beginning of the year actually. And so that's worked out well for us from a portfolio positioning standpoint. Dan, on April 1, the RBC research energy team put out an interesting piece on, what would the Canadian energy names trade at if they were to be at a similar valuation to either the European producer average multiple or the US producer average? If Canadian companies and their current levels of free cash flow treated like a European producer, they would be somewhere in the order of 18% higher than where we are today. If we're looking more at US multiples, you could argue that Canadian names could trade as much as 30% higher just coming back to a similar type of valuation to US peers. So that's interesting and that's consistent with what we've seen. And quite honestly, our investment thesis in the space is significant free cash flow. In the US, it's one of the highest free cash flow sectors, even compared to technology and some of these other sectors that are earning significant profits. So just ties back to our thesis for being overweight energy as you mentioned. No, that makes perfect sense. I think the take away here is, as we mentioned, market breadth expanding, other sectors participating. And that's what you see here is not just energy, but materials, industrials. The other sectors in Canada are really picking up the pace in terms of returns. And tech is still doing well. So it's not like a significant divergence, meaning like tech is down while these other sectors are up. It's just relative performance is starting to outperform from the other sectors. And I think, again, this is a very positive thing as we want to see other sectors do well in a bull market. And so when you look at this quilt, this is the US in particular, energy also, again, worst performing sector for 2023, best performing sector Q1 2024. But technology, which is communication services for people that don't know, Google actually sits in communication services, is still one of the top performing sectors. So it's not like it's underperformed relatively speaking. It's just relative, I would say, modest underperformance. You can certainly see the sector rotation in this chart if you just pick out a sector. The other sector that we've been quite favorable on and talked about in the past is industrials. Just given the level of spending on industrial and manufacturing, those types of companies really benefited on the back of that. So we've seen a couple quarters of outperformance out of that space as well. Financials have done quite well. They're taking a little bit of a breather here, but that's to be expected. I think if I were to summarize what we've been chatting about today, last time on the podcast, we talked about market breadth and how we were expecting a pullback or a bit of a correction. I would say that's still the case and maybe yesterday's inflation data print is the start of that. But again, we still don't think it's going to morph into something more significant than, call it, your run of the mill or average pullback slash consolidation period. Would that be fair to say? I think so. If you think about really these short-lived pullbacks we're experiencing, combined with the fact that there's more than 6 trillion of cash on the sidelines in the US and more in Canada, it feels like there's momentum to this rally and we could be just partway through. I like it. And as we've been discussing here, because one sector is down, it doesn't mean that other sectors can't be up. And when we're thinking about positioning portfolios right now, we're looking for those other sectors that could actually do well even through a consolidation or correction period. And that could include something like energy, which is what you're seeing right now. So again, when you think about how the market's going to move, it doesn't uniformly move in terms of underneath the hood which sectors and companies are moving. There's still opportunities even in a sideways trading market, which we could be heading into. And then just lastly, to the downside, we've seen some continuation of negative sentiment on interest rate sensitive sectors, like real estate, communications. Anybody that's highly levered needs to come back to the market to refinance some debt in the next couple of years. With interest rates doing what they're doing and yields moving higher, that's continuing to weigh on real estate, utilities, and telcos. That's a good segue. I mean, what are we watching in markets right now? I think yields and interest rates are probably something we're going to talk about in the next podcast here, but what's on your eye? Here's what's in the calendar coming up, Dan. Tomorrow Friday, April 12, JP Morgan kicks off Q1 earnings season, with BlackRock leading the charge. Next week, we'll get the Canadian Federal budget on the 16. We'll share our thoughts and some RBC analysis on that with clients. And then after that, we'll get one more CPI, PCE, and PPI inflation REITs before the June 12 US Fed meeting. It's interesting, Dan, after yesterday's hotter inflation data, the odds for a June cut have fallen all the way to 20%. What was that number beforehand? I think it was about 50/50, actually, or maybe even higher than that. So it was a pretty significant shift in just expectations for rate cuts. And interestingly, I think the odds of a July rate hike are only sitting at around 40% now. So this ties into one of the themes that we have had all of this year is that we didn't expect as many interest rate cuts as the market was pricing in to start the year. So I don't think it's really a surprise to us, but it seems like the market's finally catching up to that view. And then we'll get into eventually here the election season, too. We've talked about that and written about that for clients in the past. But typically, elections tend to be pretty positive years on the back of some promises from incumbents or candidates. But so far so good this year, Dan. We'll leave it there. Thanks for listening. [MUSIC PLAYING]

Hello and welcome to At the Money. I'm Daniel Cheng. I'm Graham Ingram. We're with the Becker and Cheng Wealth Group, RBC Dominion Securities. Today is Thursday March 7th. Today, we'll be talking about equity market strength and if we're due for a pullback. That was a catchy headline, Graham. We're sitting here, I'm looking at markets. It's about to close. All time record highs again in the S&P 500 and NASDAQ. Some stocks look parabolic on a chart basis. I think it's a natural question that everyone's thinking about. What are your thoughts? Yeah. Certainly, Dan. That's a question we're getting a lot these days is, are we due for a pullback? So as everybody's aware, the market's had a really strong period here over the last four months. So much so, in fact, that we're up more than 25% since the October low. And that was after a 10% pullback that we saw last summer in August, September, October. We're up 16 of the last 18 weeks. On a TSX basis from October lows, we're up about 16%. That's really interesting. I saw a chart from a bespoke research actually, one of the independent research providers we subscribed to, that said that we've actually gone more than 80 days now without even a 2% decline from the closing high. And so I don't know what that means, generally speaking, other than it's been a long time before we've had a pullback of any kind. And so it's natural, I think, to question if we need to go sideways for a bit here or consolidate some of these strong gains that we've had. We've been writing about this a lot in our weeklies, but what are you thinking? Certainly, we've discussed what a normal pullback looks like, Dan. Let's just share some stats. An average intra year pullback in the S&P 500 is about 14%. We certainly saw that in 2022 with a max drawdown of about 25% peak-to-trough. On the TSX, the average intra year pullback is about 16%. In 2022, we saw that with about a 17% drawdown. In about 60% of calendar years, then we see a 10% drawdown. And on average, there's also about three 5% pullbacks in any calendar year. So as detailed here, going four months without a 2% decline is pretty unusually strong. Makes sense. I think for our listeners, the takeaway is really that when we say the word "pullback" or you read about that in the media, it's a very normal thing. But I think people extrapolate it out to-- they hear the word "pullback," and they think a minus 40% in the market. And as you just pointed out, I mean a minus 10 or a 14 is actually normal in any given year and doesn't probably erase the fact that you could still finish the year positive. And I think the other important point to remember is sometimes these things happen very quickly. So it's not a long drawn out process. It can pull back very quickly, but it can also recover very quickly too. And so that's the challenge as an investor, I think, is just staying invested and recognizing whether this is a bigger correction or if it's just, call it a run of the mill type of pullback, if that makes sense. That's a good point, Dan. Everybody probably forgets already, but that 10% drawdown that we lived through in 2023 sentiment changed pretty quickly come November. Really all it took was a couple positive jobs numbers and CPI data prints and sentiment shifted quite quickly. So it can go both ways. But certainly, a check back here would be normal. And quite honestly, a nice little pullback would be a good opportunity to buy some of the names that you like that you don't own the portfolio already. Yeah, that makes sense. I know you're a fan of the Carson Capital Group, and I think you had showed me a table that talk about if you have a lot of strong months back-to-back, does that automatically mean that the go forward is going to be a really challenging period? Yeah. So Ryan Dietrich of Carson Capital put out a good note on just that. So he looked at a study of instances where the market over a four-month period returned 20% or more. And what are the subsequent returns to that period? The interesting part of his study is that six months and 12 months later after that 20% rally over four months, 15 out of 15 times since 1950, the market is higher. That's 100% batting average? That's right. So over the subsequent six months, the average return is about 11% and over the subsequent 12 months, it's about 18%. So certainly, as we know the markets are trending and momentum is clearly there right now doesn't mean you can't have a pullback in the near term. But certainly, the strength that we've been seeing is hard to think of that other than bullish. That makes sense. It's comforting in that sense. And I think if you layer on top of that the fact that it's a US election year and everybody knows those statistics, that in election years, markets are positive something like 83% of the time, which makes sense because every campaigning president is going to put out all kinds of promises about cutting taxes and stimulating the economy. And so generally speaking, markets push higher in election years. And so you've got that. And we're not even going to talk about it today, but when you layer on the fact that interest rates are likely coming down at some point this year, which we think will happen later on, not as early as some people were expecting, but that's probably another factor that's probably positive too for markets in general. Then we'll switch to the Magnificent Seven. Of course. Everybody's talking about the Mag Seven. Last year, the story was all about them and markets, and pretty much nobody cared about anything other than the Mag Seven stocks. This year, though, in 2024, you've seen a pretty dramatic change or bifurcation, I think, underneath. I think I've heard the term now. They're no longer the Magnificent Seven. They're what? The Fab Four. I think Tesla is down somewhere around 20%-25% year-to-date now. Apple is down 10%. Google's down a little bit. So you're seeing maybe an emphasis back on fundamentals as opposed to just buy everything. I think so, Dan. I mean, it's clear that if you draw a circle around a group of companies, there's always going to be outperformers and laggards certainly of the three that maybe have fallen out of that group. Tesla was probably the first to fall from grace on slower deliveries and some margin pressure in their business. Apple's had a period of weakness here with some growth concerns out of China. Reportedly, iPhone sales are down in the order of 25% so far in Q1. And then Google itself has had some hiccups when it comes to the rollout of their AI strategy. Some of the subsequent rollout of AI was delayed into 2024. So they've had some challenges. But obviously, on the flip side, there's still some positive momentum on names like NVIDIA and Meta. It don't make sense. I think one of the things we probably will talk about in the future here is generative AI and the implications it has for everything, not just markets, but companies as well. And certainly there's probably a secular theme that's going to last for a number of years here and how are we going to participate in that and how is it going to affect everything else? But I think maybe what this alludes to in this change underneath the market for the Mag Seven is that perhaps finally, market breadth is starting to improve. And for listeners underneath that don't know what that means it, it just means broader participation in the stock market from other companies. And it's a good thing usually when you see companies in different sectors and other industries participating in the positive moves. I think it's generally a very healthy sign, if that's the right way to put it, Graham. So let's talk about that then. So market breadth is really just what percentage of the market so sectors or stocks are participating in the move? When you look at the equal weight version of the S&P, we actually are back at all time highs and even yesterday, today, breaking out to new highs. So that's a positive thing. The difference between the equal weight index and the market cap index is essentially there's about 12% less technology, about 5% less communications, and where it's reallocated is to places like industrials where it's 8% higher. So you just get a better breadth of participation amongst sectors as well as companies. In addition to that, Dan, we're seeing 52-week highs at new highs. And on the downside, there's really not a lot of new 52-week lows. So that can be viewed positively when it comes to breadth. No, that's great. I think probably surprising to a lot of people is that in Canada, on the TSX, the best performing sector year-to-date in 2024 is actually energy. And the reason why I think people would be surprised is because last year, it was actually one of the worst performing and really didn't do anything. And this is despite the fact that natural gas is under $2 in MCF. Oil prices are in the mid-70s range. It's not $100 oil. But yet the energy sector is pacing double digit returns as a sector and even industrials is actually doing really well. In the US, though, same story as last year, tech is still leading the charge. But I think it's really important to note that the rotation of money potentially is going into other areas of the market. And that could be how you get the second push higher in the market here is just that money movement out of the high flying sectors. Would you agree? I would agree. Certainly, technology hasn't given up the leadership. But what's different in 2024 at least, some of the other sectors like health care, financials, industrials, are participating. Up until November of last year, many indices and subsectors were even down until the last two months of the year. So there's more participation of those other sectors in 2024. And that's generally viewed as health in the market, to have more companies participating in that rally. It makes sense. So I think the takeaway for today is really if we think about markets where they are right now, all time highs in the US in particular. A normal pullback or consolidation sideways trading period would be very normal here. And it doesn't have to portend into something much bigger. And if anything, we're probably inclined to add cash to work at that point in time. And so we're holding our equity exposure here, but we are rotating some of our exposure underneath. And obviously, we've been talking about market breadth for a while here and we want to watch that too to see that it continues to improve throughout the year. And so I think that's one of the takeaways that I'd have here is, yeah, of course, pullbacks possible, but we're not thinking that it's going to turn into something bigger. And as we think about the coming weeks and months in the market, just thinking out loud of what the potential catalysts could be here going forward, Friday, March 8 this week, we've got the nonfarm payrolls. Next week will be an interesting one. It's the US CPI on Tuesday, March 12 and the PPI on Thursday, March 14. So as we alluded to before, some of the inflation prints in recent months have been turning points for market and the whole inflation is certainly coming down. So that's been supportive of markets, especially as we move towards rate cuts at some point in 2024. But we'll be watching those events over the next couple of weeks specifically. Hope it makes sense. Always lots of data to watch out for. And so we'll be keeping a very close eye in the next few days here. Well, that's it for us. Thanks for listening. [AUDIO LOGO]

Hello, everyone. This is Dan Cheng and Graham Ingram with the Becker and Cheng Wealth Group. And we're delighted to have a special guest with us, Jim Allworth, to share some of his insights and discuss what's going on in markets. So we thank you all for listening in on this inaugural edition. With that, I'll let Graham take it away and lead us in the conversation. Thanks, Dan, and thanks for being with us today, Jim. Maybe just to start off, early in 2024 here, can you share your thoughts on maybe asset allocation coming into the year where you're seeing opportunities? Well, I think the big change out there has been in the bond market more than in the stock market. The stock market, after all, is pretty close to where it was two years ago. But the bond market has changed fundamentally. And not only has it changed, but it's not going to go back to what it was at least in our view. And I'll maybe outline why and what it means for a portfolio. So it's not going to go back because we're not going to get extreme policies from central banks, which is what got us those ultra low rates in the first place. The need to drive long term rates down as well as short term rates, which was provoked by the financial crisis where the banking system was at risk and low rates would allow it to-- including long rates would allow the bank to rebuild its capital base. That became the policy of choice for some time. The financial crisis was followed by the European sovereign debt crisis, which was immense and profound. And people have long since forgotten it. And then we had a number of minor things between 2013 and 2020. And then, of course, we got the pandemic. So in a way that they'd never done before, central banks waded in to try and affect long term interest rates. They were usually content to have long term interest rates, generally follow the short term rates that they could control down or up. But in these instances, they took a much firmer hand and they waded into the bond market and everyone from the Fed to the Bank of England to the Bank of Japan to the European Central Bank and to some extent the Bank of Canada bought bonds in immense quantities to drive long term interest rates down. And that introduced what turned out to be a decade of abnormally low rates, but they were only that low because of central bank action. If it had been markets that were deciding where the yields were, they would have been an order of magnitude higher. So we lived through that period, and that period produced behavior on the part of investors. And it went like this. In the fixed income portfolio, where usually people own a number of securities that mature at different times, say something this year, something maturing next year, and the year after and so on, 5, 6, or 7 years in total, you're on automatic pilot. Essentially what you would do is, whenever something matured, which something would every year, you would take the maturing value and the money and you'd reinvest it out at the long run to make the latter whole again. And that way, the income delivered by your fixed income portfolio would change with interest rates as they change but slowly. And that was quite desirable. Well, in the period I've talked about, from about 2009 out to the pandemic, whenever you had something mature in your fixed income portfolio that you'd own for five or six years and you bought it at quite a decent rate, historically, when you went to reinvest it, you were reinvesting at a much, much, much lower rate. And people found that difficult to deal with, both in terms of the income it generated and just their sense of whether their portfolio was suffering because of this particular phenomenon. So a lot of people looked around for higher yields. And you could find higher yields if you're willing to take more risk in debt and buy riskier debt, and some people did. Or what a lot of people did was buy stocks for dividend income. Because dividend yield turned out to be not too different than the yield on bonds. At 1 point, 65% of the stocks in the S&P 500 had a dividend yield higher than the yield on the 10-year bond in the United States. So it was pretty compelling idea to take the money that matured from a bond issue and go and buy a big seasoned company that you knew and knew was going to be around for a while. Let's say, Johnson & Johnson for the sake of argument or somebody like that. Had a long history of paying their dividends and had a long history of raising their dividends. And you knew that if you owned that for three or four or five years. You'd probably get at least two or three dividend increases out of it. And pretty sure certainty that those dividends would be paid. People did that. The exposure to equities rose over that time across portfolios in our book but everywhere else as well. And it was a happy incident because, in fact, the incomes did rise and there was no real opportunity cost. In other words, it wasn't like you could have made more money in owning bonds far from it. So that would still, perhaps, be the trade of choice, except that central banks have abandoned their quantitative easing that extreme policy that kept long term bond rates low. And we think they're unlikely to go back to it unless they're faced with another gigantic crisis. Well, that means bond yields are now being determined by the market, not by extreme central bank policy. And just like a beach ball that's held underwater, when your hand is taken away, the beach ball goes from that unnatural state of being held under the water to the state that it's used to, which is at water level. And the process of going there usually even jumps above the water level for an instant before it falls back. And that's really what the bond market has gone through in slow motion for the past couple of years. It wasn't that long ago. The 10-year bond in the United States was yielding half of 1%. And now it's yielding about 4 and got up threatening to get to 5. But is now settling back to the water level, if you like, which might be where yields were say, before the pandemic, which is somewhere between 3 and 1/2 or 4. Well, if you're waiting around for ultra low rates to come back, in our view, you've got a long way. We're back in a position where if something matures in a bond portfolio, we think the right thing to do is as long as your bond ladder was designed to go, which in many cases is five, six, seven years and reinvest it at that, and then get back into that groove, does that mean that you go and sell the good stocks that gave you dividend increases? Well, maybe not those stocks, but if you had some stocks of lesser quality that you might not like to own in a recession, for example, maybe that's where you-- if you wanted to go back to a normal weighting and fixed income, maybe that's how you do it. So I guess the story is, the big changes in the bond market, the bond market is now being driven by the forces it normally is of the market. That should produce behavior that's more normal in the bond market and we'd like to have a better exposure to fixed income than we probably have at this instant. That's excellent. Jim, people are familiar with your recession scorecard. And we share that work with our clients through the Global Insights weekly and monthly publications. Through most of last year and into this year, some of those indicators are flashing red. So maybe we're more likely to move into a recession this year. To your credit, though, despite some of those flashing signals, you'd also-- the same time mentioned there's so much momentum in liquidity in the market that we could probably still see all time highs, which is where we're at now. Can you give us an update on you outlook for the recession and the scorecard, and maybe just the short term in the equity? Sure. Let's do it in that order. I think the big news is that the scorecard was all green 18 months ago. And now it's two green and two in the orange having made up its mind category and three in the red. And that fundamental difference should be noted. It's not all red. It may never get all red. But from our standpoint, underneath just the sheer numbers, the two most reliable leading indicators of recession have gone red. And one of those is the shape of the yield curve, which is just the relationship between short term interest rates and long term interest rates. And the normal relationship is for short term rates to be lower than long term rates. And that's not just because that's the way it normally is, it's because there's a logic to it. And a logic is simply the longer you are willing to tie up your money in a loan to the government or a loan to a business, which is what a bond is, the higher the rate you want because you have to go through a period where you don't know today what's going to be happening in your 2 or 4 or 6 in that contract. And so you want to be paid something extra for things going in a way that you hadn't anticipated. The guy who only invests for 90 days, he doesn't get that protection because his interest rate will change in 90 days. But the person who's stuck with an interest rate for four or five years wants extra going in. So that's the normal way things would be. What's abnormal is when short term interest rates rise above long term interest rates. That means that logic isn't enough to carry the day. What it means is liquidity is tightening, it's hard to get money, it's hard to get loans. The arrival of tight money and tight money is the trigger of recessions. So the yield curve inverting, in other words, short term interest rates rising above long term interest rates, which happened in the summer of the year before last, was a big deal for us. The other thing that is difficult for people in this is the pesky fact that leading indicators lead. So when a leading indicator goes negative, it doesn't tell you that something is going to happen right away. It tells you that something's going to happen later. And in a way, the most valuable leading indicator is the one that tells you the furthest ahead of time. That something bad is coming. Because it gives you plenty of time to think about what you're going to do. But it also makes it the one that is hardest for people to get behind because they're waiting and waiting and waiting. And I used to say it this way. The yield curve would invert and everyone would notice it and say, a recession is coming. 90 days would go by and the GDP report come out and it was still pretty good. And another 90 days would go by and it was still pretty good. And another 90 days would go by it was still pretty good. And now you start to see articles writing, well, this time it's different. And another 90 days will go by and was still pretty good. And another 90 days will go by and you get your head handed to you and the economy would convulse and you go into difficult time and the economy contracting and earnings were probably falling and share prices were falling and people's complacency and optimism gave way to fear and pessimism and all those things that we know those periods have. So we're really only in now the sweet spot where those things that went negative back in 2021 would be saying a recession would arrive. And we definitely know that we've gone from easy money to tight money. 18 months ago, interest rates were 0 and banks had the doors wide open all around the world looking for creditworthy people and businesses to lend money to. And today, interest rates are not 0. They're at 5 and 1/2% in the US. 5% here. And banks don't have the doors wide open. They're being very cagey about who they're opening the door to. And people or businesses who would have got a loan a year ago or two years ago are no longer getting loans. So tight credit is a powerful, influence on GDP and employment eventually. And we think the eventually part is coming closer and closer. Now, having said that, as you know, there's two things. First of all, the relationship between the stock market and that is also-- the timing isn't actually perfect. Bear markets usually start before recessions, not always but usually. But the good times can roll on longer than you, anticipate. And our sense that we're going to face new highs was based on a couple of technical factors that a lot of people don't look at but we do. And the most important one was that the breadth of the market usually leads. And the breadth of the market was quite strong and the way you can measure that was a variety of ways. But one of the ways is called the advance decline line, which is simply looking at the market at the end of every day's trading and saying how many of the 500 stocks in the S&P 500 or the 300 in Canada were up today. How many were down? Subtract the number down from the number up and take that number and put it on this index called the advanced decline line. You do that day after day and you have a line that looks a lot like a market. It tends to go up when the market's going up, tends to come down when the market's coming down. But usually, when the next turn in the market down is is a major talk. The advanced decline line has already been going down for several months. And the advanced decline line hasn't been going down. In fact, it reached new highs before the market did. And it told us there was a lot more participation there. And you have to forget the economy for a moment and then just go and look at the market. Earnings are reasonable, not great. The valuations are not compellingly cheap, but they're not mind numbingly expensive either. And there's still room in that for this momentum to carry forward. We think that will, at some point like it always does, it will give way to a downturn. And if the downturn is, in fact, happening with the recession in the offing and a recession arrives, then it'll be somewhat more painful and last somewhat longer that other corrections. That's really what you're talking about. So I think that's worth paying attention to if for no other reason than to prepare your psychology for it. If the reality is that bear markets give you once in a decade opportunities to buy great business at fire sale prices or at least at lower prices, then keeping your wits about you in that period and waiting for those better prices is a constructive thing to be able to do. But that's not what happens. Most people remain in the bullish camp too long, find themselves on the wrong side of a market going down, start to worry about it. And at the worst moments of the market going down start to concern themselves that if this goes on further or even last and doesn't recover, that their life is going to change and all these things start to push them to make decisions in the middle of pressure that are not great decisions. And so I think forewarned is forearmed here. So if I relate that back to your first point, I think simplistically obviously from an asset allocation standpoint, the appeal of fixed income, perhaps, has improved. Maybe the best it's been in a decade. And from an asset allocation standpoint, what I'm hearing is, obviously, diversified portfolios make sense. And in order to take advantage of these great buying opportunities during a recession, you need dry powder or something, a source of capital to be able to allocate. Because if you're fully invested, then clearly you wouldn't be able to. So would you envision this time around fixed income providing that same ballast? It historically has, with the exception of 2022, in terms of if you do get a recession in the economy, bonds should provide that support this time. And also provide a source of some liquidity to put that money back into equities. But first of all, if you have a bond that is working, you'll have something mature. Yeah. So you'll have something come at you. And you'll have some income that you can reinvest. So yeah. I think it will. I think we've been underweight bonds for a long time. And we need to be market rate bonds. We don't need to be overweight. But we could overweight them if we really thought a bear market was in the offing. And that would give you a little bit more dry powder to do that. But I like the idea that one, it's not all or nothing. It's not in the stock market or out of the stock market or in the bond market with both feet and out of the bond market. It's a balance to get what a balance gives you, which is predictability. And the reduced volatility that you can live with. And that quality matters. And that the degree to which you're willing to make changes should be prescribed inside this framework that you can make a mistake in that. It's just not the mistake that's going to change the ballgame for you irretrievably. And I like that. So I would say, I want to make sure now that my bonds are at least what I think they should be. At the very least what they should be. And if they're a bit more, that wouldn't bother me. And want to be sure that the stocks that I own are stocks that I really do have a commitment to the future and think that they're going to bring something over-- what you're really buying when you buy stocks is not the price in the paper every day. You're buying the high internal rate of return that that business has been able to earn. That's why it's in the index on the shareholder and-- the shareholder's equity and capital invested in the business. And the price of the stock can go up and down. But that intrinsic value just keeps growing as long as those companies don't make losses. So you want to, I think, think these, if you're worrying about a recession coming, you think about the kinds of businesses you don't want to own in recession. And maybe look at them and ask, do I own any of this? Even good companies need to be sold from time to time. I've learned. It doesn't mean that you might not go back and own them again later. It just means that there may come a time when they're not the thing that should be in your equity portfolio. I think that an examination and a reacquainting with risk appetite is always appropriate. And right now I think in particular. No. I like that. I like the idea of not being like 0 in 100 and 0 in terms of weightings, which I think investors think about now. That's very like-- it's all or nothing as opposed to this overweight, underweight type of mentality. Even that definition, I think, for people when they hear those words is like much larger than we'd expect. These things are always-- they're extremes. And don't like extremes. Yes. I'm a guy who's in the middle. I mean, the extreme is that who needs 20 stocks? Who needs 30 stocks? Just give me the one that's best. That's right. No problem. There's been some mega trends in place for a couple of years now. And so those include things like technology. Certainly, large cap companies are dominating the space. And certainly, growth is a factor that's outperformed as well. Are there any factors you track or places you want to be at this point in the cycle? Well, I'm always attracted to growth because I think even when you're talking about what people call value stocks, what makes them work is growth too. You need value of all kinds. And I think large cap is going to become even more important because I think that recession or no, we're in for an extended period of slow growth. And that I think is a-- slower growth in the economy means more intense corporate competition. And big companies tend to win in that competition at the expense of smaller companies. Well, the market's saying that too. Large cap have been running, mid-cap have been mostly keeping up but not quite, but small cap's been a disaster. And small cap really has not been a consistently rewarding place for quite some time. And I think it's going to continue to be difficult. Small cap has another problem, which is the survivor bias. There's thousands of small cap companies. And is very hard to go in and pick the ones that can win in that. And it's much more likely that a few of them are going to turn out to be torpedoes. And torpedoes are real destroyers of wealth. So you can usually avoid torpedoes in large companies if you're reasonably prudent. But in the small cap, I think it's a cost of doing business. And think large cap is poised to win even bigger in the next decade. Maybe I'll ask you a question that Graham and I get a lot of in terms of just, as Canadians here, we always think about currency and the Canadian US dollar in particular. And nobody really talks too much about any other type of foreign exchange rate. And so I don't know if you have thoughts on the outlook for the Canadian dollar I guess respective to the US dollar. I will do. And would just say that, thinking that you can be right about currency is a delusion, which doesn't stop me from being diluted. But I know lots of people in the UK and there's lots of investors in the UK. And they're very currency-driven. They start with the currency and then go buy stocks where they think the currency is going to be strong. And they don't have very good investment results because they've tried to pick the most difficult thing first and they're not that good at it. Nobody is. I remember Alan Greenspan saying that the Fed took an interest in currency movements and decided that they wanted a better way of forecasting them. So that they could incorporate that into their monetary policy. And so they went out and they commissioned a lot of studies by academics and by their own economists. All the heavyweights in the field. And they got all this work back and they looked at it and they concluded that the result-- that all these studies that they looked at that purported to be able to predict where currency is going gave you a result that was about equal to flipping a coin. And he figured that the chances of getting the direction right on three currencies is about 4%. You got about a 4% probability of getting the currency direction right on three currencies. So if all those smart guys can't do it, then what are you and I with a pencil in the Saturday globe mail going to do? I just don't see it. The other thing I'd say is, when I own a portfolio of businesses, every one of those businesses has a management that walks into work every day and manages their business in a world of variable currencies and manages it to try and diminish the effect of that variability. So you've already got guys on the ground managing that in part of your portfolio for you. So having said all that, now I'll tell you where the Canadian dollar is going to go. And my answer would be, look to central banks because they're the guys who rig the game. Capital flows back and forth across the border between Canada and the US, capital moving from one or the other are six times larger than trade flows. Occasionally, they balloon up to being 10 or 11 times, the size of trade flows. So it's the movement of capital that drives where the dollar is going, not trade. Politics don't matter. It's the relative interest rates in the two countries and where they're headed next. So the picture you get in your mind is you've got a suitcase with a couple of million bucks in it. You're standing on the border, you can put it down on other side of the border where you're going. You're going to go to where the best risk adjusted return is. So what you need to know is. There are countless billions of dollars actually doing that every day. And what they need to know is what kind of a 90-day treasury bill, let's say, rate am I getting here? What am I getting in the US? What's inflation in both countries because I want to know what real rates I'm getting. And where are both of those things? Inflation and those rates in those countries going over the next six to nine months. If I can get all that right, I can probably get the direction of the currency movement, right? But probably not the magnitude. Well, there's enough in there that you can make a mistake on. That what people do is just listen to the central banks. And our rates are lower than in the US, our central banker in many people's minds is more eager to cut than they are in the US because he's worrying about a household debt problem and a mortgage problem. So most people would think not only am I getting a lower rate in Canada, but I might get an even lower rate if he cuts before the Fed does. And our dollar which strengthen a little bit with energy prices is now weakened, again, with that prospect. In order to get our dollar moving in a way that gives you the possibility of getting back to par, you need a central bank that's raising rates or not cutting them here versus the Fed. We've got to be more aggressive. Usually, those periods of more aggression on our central banks have happened when our economy has been hotter than in the US. Our economy's usually been hotter than the US only when the resource sector is really thriving. So what you have to have is you've got to have resources roaring then you can start worrying about a dollar through purchasing power parity, which is $0.83 to $0.85 and maybe going to a higher level. Without that, getting above purchasing power parity, I think, is highly unlikely. So we're in the 70% range-- 70% to 80% range in my mind for quite some time. Maybe we'll just touch on that last point as a last question, Jim. But in the commodity space, inflation has basically gone from 9% to, call it 3% or less depending on how you measure it. Over a good chunk of that time, commodities have been a good offset in portfolios for inflation. Is there any risks that inflation spikes higher again? There's some precedents in prior cycles where that happens or I would say, the bull case right now is inflation really has come off and is justifying these levels of valuations. Yeah. I think there's still a danger that it gets sticky in a few places. And I think central banks are aware of that and they're going to stay tight for as long as they can justify it. At some point, they won't be able to justify it and they'll have to cut. I think that their preference would be-- the thing that would persuade them that the inflation fight is over would be some serious deterioration in the employment picture. We're getting more of that than they are, and we still aren't doing that badly here. So that still may be quite some ways off. And I think that one of the reasons commodities have been not doing as badly for us is that we forget that we've had 10 years of underinvestment in commodities. It's not like there's giant amounts of new production of anything coming on stream. And so if you get factory orders picking up and a few other things like it, especially you need China to come back. And that will happen to some degree. But this is not a rest period for China waiting to go back to 10% growth. This is somebody who might, if they put everything together nicely for one year, might get-- manage to get a 6% year out of it. But really, this is a long term decline on its way to 4% than 3% and so on. Perfect. Well, appreciate your insight and the time, Jim. It's always a pleasure talking to you. And so I think we'll wrap it up there. And stay tuned for our next Q&A session. Thank you. My pleasure, guys. [MUSIC PLAYING]