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This episode, Stu Kedwell, Co-Head of North American Equities, reflects on this quarter’s earnings reports and how the market has reacted to them. Stu also discusses what’s ahead for earnings in the fall, as companies brace for the Delta wave. [7 minutes, 18 seconds] (Recorded August 3, 2021)


Hello and welcome to the Download. I'm your host, Dave Richardson, and it is Stu’s days. A fully vaccinated, fresh from a week vacation, Stu Kedwell, here to talk about earnings season. Stu, welcome.

Hi, Dave. How are you doing?

I'm good. I'm under vacation, well vaccinated. I'll be going soon. But it's nice to have you back for Stu’s days. And it comes at an opportune time, I think, in terms of an update, because we've largely come through the core of the earnings season in July. And it was a pretty interesting earnings season in terms of the results and how the market reacted to it. You had mentioned on a previous podcast that you'd anticipated this is the way it might play out. So what are your thoughts now that we're through it?

Well, I think in our last podcast, we discussed how the bar was pretty high for some of the big secular growth stocks, and many of them reported last week. And that was, in fact, the case. Despite some very strong year-over-year growth numbers, we didn't really see any of the expectations meaningfully change going forward, nor did we see the share prices react in a really positive manner to some of these numbers that were released. In fact, if anything, some of them sold off a little bit, following what was strong, but not surprisingly strong numbers at that juncture.

We've got the bank earnings and we'll do some specific work around that, coming later this month. And some other firms are reporting through August. But maybe take it to the fall, and as you look at the next earnings period, do you think that bar is going to be the same? Assuming markets stay where they are right now, do you think we're going to have a similar kind of reaction to earnings in that period?

I think it'll be interesting, when we think about the stock market, which is not too far from highs. But if we think about it as a market of stocks, the average stock has actually gone through a bit of a correction here, in the last six to eight weeks, which reflects some concerns around the slowing of economic growth on the back of the Delta variant, on the back of maybe some reduced stimulus going forward, things like that. So, as we get into the fall, what we're going to be looking to do is to position the portfolio for the passing of the Delta variant at some juncture. What is in the headlines today is not what you're looking to prepare the portfolio for. So case counts are up. The concern is out there. There's concern in many countries. It's caused some discussion around the strength of the economy. Interest rates have dropped in response to it, which is always a very good thing to remember. Interest rates drop, liquidity gets flushed back into the system so that asset prices remain at reasonable levels while we go through different soft spots. But eventually the Delta wave will also peak and time will tell as that happens. But, that's what we are still looking; in the average company, which has a more reasonable valuation, looking at those stocks on the other side of the Delta variant, which in all likelihood will be sometime this fall.

We've talked about this a lot on this podcast. First of all, it's tough to bet against the market long term to begin with. And one of my favourite things to do is to go back at different points in history, just before you saw a big drop in markets or just before you saw a huge bounce back in markets or in the midst of a drop, and read headlines and read articles. And so if you go back to last March and you read anything about the markets— and don't forget, that's just at the front end of Covid, as the lockdown's are happening—, you'll be hard pressed to find an article that would have said that the markets were coming back at all, let alone a year later, be sitting at all-time highs again. And it just highlights that you need to look forward in that decision making. And if anything, the Delta variant could be presenting some real opportunities, because I think we know from our previous experience with other variants, in the initial wave, that we figure out how to deal with it. We move forward, companies move forward, companies make more money and stocks go up. And that's something you want to think about.

I think that's bang on. What do we think versus what do we know. That is something that I always try and make those two tables. When I think at what we do know, which has been pretty consistent, which is that interest rates are likely to remain low. Eventually we think that they'll rise, but real interest rates, importantly, are likely to remain very low, maybe negative. So, chipping away at your purchasing power. Asset prices are supported in that type of an environment. So even though we have volatility in some of the headline economic numbers that we're getting, dollar cost averaging, which I'm a huge fan of— even on vacation, I was dollar cost averaging last week; every week I pound away at it— dollar cost averaging is an excellent tool in an environment like this, because we just know that that dynamic of a very low to negative real interest rate is likely to persist, and getting portfolios on the asset side of the equation can be quite beneficial during that environment over time.

I'm a little confounded at this point Stu. I just did not expect dollar cost averaging to be suggested as a viable strategy. That came right out of left field for you?

Dollar cost averaging is one of my favorite things to do on vacation, Dave.

I know. One of your favorite things to do from an investment perspective. And really, it’s been a fantastic way for investors who have been nervous all the way through this to continue to invest and add to the portfolio. And it couldn't have work better from your perspective, right Stu?

A hundred percent.

A hundred percent. So, Stu, thanks for coming back from vacation, because I know you were having a good time. And we'll catch up with you next week. Thanks again for your time.

Thanks for having me, Dave. And thanks to everyone who listened.


Recorded: August 3, 2021

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