Hello and welcome to The Download. I'm your host, Dave Richardson. And we are joined today, as we always are on Tuesday, by Stu Kedwell, the head of global equities at RBC Global Asset Management, because it is Stu's days. So, Stu, how are you doing?

Wait a second. I'm not Stu.

What happened? You're Sarah Riopelle.

I know. Maybe he was busy today and he sent me instead.

Wow. This is an extra special Sarah's Day that we're going to do. Actually, I'm at a conference in Vancouver today, and everyone was asking me, when are you going to have Sarah on again? I go, she's on like every week. They go, no, she probably hasn't been on for six months.

Has it been that long?

It's been a few months anyway. So it's great to have you. So Stu's in New York City, digging for gold or some other great ideas around investing. And Sarah Riopelle, of course, is responsible for all of the portfolio solutions at RBC Global Asset Management. So one of our favorite guests and one of our listeners' favorite guests, because she can give such a great overview of everything that's going on and then how it builds together into the right portfolio, which is what she does. She builds these great portfolios, and then hopefully you invest with her or she'll be able to guide you on some things to think about as you're managing your own portfolio. So again, Sarah, thanks for jumping on.

It's my pleasure.

And jeez, it's been pretty quiet in the whole global economic world and everything, right? There's not a whole lot you're thinking about?

No, not at all. To begin with, we should talk about the chaos in my life in general, because my son gets married on Sunday. And so I'm not sure for all of you out there who have gone through wedding planning before, it's complete chaos. So I don't know what's more stressful, wedding planning or the global stock market and economy. Which one do you want to talk about first?

Well, you're right. I was actually going to ask you how he's doing in high school, and now he's getting married.

You've missed a few years.

Yeah, apparently. Well, you look younger than ever. Maybe it's good to have a child getting married. Maybe it'll take some years off me.

Well, we'll see. But thank you. You always know what to say.

Okay, so the wedding thing. I also host a wedding planning podcast that you can log in and sign up for. But this is the economics and market podcast, so let's stick with that.

We'll focus on that. You know what? I come here quite often and say, economy is doing this, the economy is doing that, and there's lots of risks, but there's lots of opportunities. And the same is true again today. There are risks on the horizon. We have the US administration that continues to work through their plans and their policies, and it tends to change from one week to the next, which causes volatility in markets. The AI theme in markets continues to be driving results, particularly in the US market. We've seen strong gold prices driving the Canadian market as well. We've seen interest rates fall from 4.5 down to 4%. Everything seems to be working right now. Stocks are up and bonds are up, and that's making for good returns for balanced funds. All in all, it's been a pretty good year to be an investor. What does that mean for the future, though? There are some risks you have to start paying attention to, valuation risks in the stock market, particularly in the US, those returns being driven by AI-driven technology stocks, some valuation risk in Canada because we've got a lot of gold and banks driving returns in Canada. How sustainable is that going forward? We had some news about regional banks in the US recently. President Trump talking about tariffs on China. It does feel like with current valuation levels where they are that maybe you need to be a little bit more cautious about where we go for the next 3 to 6 months. With that in mind, we actually reduced our equity weight late last week. We still have a small overweight in equities relative to bonds, but just a little bit less so than we were last week because we wanted to take some profits on those positions and get a little bit closer to neutral as we think about what the next 3 to 6 months might hold.

I think this is really interesting because you're taking some money out of stocks and you're moving it into cash. And for the listeners, just to put that in perspective, when Sarah is moving 1% out of the equity portfolios, this is billions of dollars that she's moving. It's a 1% tiny, but it's still a very large move. But it also highlights within anyone's portfolio, the idea that you don't need to go from 67% equity to zero. You can go from, as you did, 65 to 66 to 67% and take advantage of that 2% overweight when the market really runs and then be a little bit more cautious, take it back down to 66%. You don't need to make these big swings one way or another. You're sometimes just fine-tuning the portfolio. And then again, you're waiting in stocks just on the growth and appreciation of stocks recently push you up to a higher level. So you're trimming some of that. But the big idea that when you're managing a portfolio, you want to be vigilant, you want to make moves on a regular basis, but they don't have to be these swing-for-the-fence moves. Sometimes it's just a little window dressing—looking at my beautiful window dressing in the hotel here—and it's just around the edges, right?

Yeah. And I appreciate that you actually made the baseball reference. Go Blue Jays. But it's not about trying to go up to the plate and hit a home run every single time that you're there. It's about just hitting singles and doubles consistently over time, and you'll be able to bring in the runs and generate the results on behalf of clients.

Yeah. As you say, even though when you look at the pluses and minuses of holding equities, you're still in a position where you want to hold stocks and you want to be a little bit overweight, but there has been, as you suggest, a small change in the risks that are out there. You mentioned all the different risks. And so that gets you in a position where you just take a little bit off the table and then you take a step back and take a look.

Right. And then if some of those risks resolve themselves or if they turned out to be false alarms, so to speak, then we have cash sitting there that we could put money back into the stock market should some of those clouds dissipate. Or if those risks become more acute or more apparent, then we can take the extra equity weight out and move back to cash. So it's about being active, monitoring everything on an ongoing basis, and constantly revisiting your assumptions and your forecast when new information comes in to see whether or not the current positioning still makes sense in that context.

So just in keeping with the theme around the wedding planning, but bringing it into your portfolio mindset, we had a question sent in from listener Karen McNally, and she asked, what keeps you up at night when you're looking at all those risks that are out there on the landscape? What's the one thing that stands out to you? You mentioned some of the concerns around lending in US banks. You mentioned, well, the Trump administration is an ongoing concern on a number of fronts, tariffs, etc. What's keeping you up at night other than the wedding?

I think right now it's probably valuations in the US equity market. There's a concept in markets called «price to perfection», and it feels like the US equity market is priced to perfection. Everything has to go right right now to justify the current valuations and the current levels. Quite often, these bull markets can run for quite a while at these high valuation levels, but when they decide to turn, they can turn quite quickly, and that correction can happen quite quickly. It's just about constantly monitoring what's going on and trying to protect our client assets as much as we can in the face of that potential volatility coming ahead. But then you have to take a step back and say, this is a short-term correction in markets. This should not affect our clients' long-term investment goals. You have to balance the short term with the long term. Many of us and our clients are investing with a long-term time horizon, and so they should focus on what they need to earn over the next 10, 15, 20 years and not get overly focused on what's going to be happening in the short term. I always want to be careful. We always have these calls and we talk about what's going on in the markets, what's your short-term outlook on markets. But you always have to make sure you're balancing that against what the long-term needs of the portfolio are. Over the short term, I am concerned about valuations in the equity market, but that doesn't mean that over the long term, I'm going to shy away from equities because I still believe that you need to have a pretty hefty equity allocation over the long term to be able to generate the returns that you need to meet your retirement goals or whatever your goals are.

Yeah, and we've talked a little bit about this. With markets sitting at highs, they're pretty clearly saying that a year from now, the economy is probably a little bit better than it is right now. Interest rates are a little bit lower. But even at that front, they can get ahead of themselves. And that's, I guess, the concern that you're expressing.

Right. And it would be more of a consolidation or a correction where the earnings that we're forecasting have to catch up to the valuations where we are at now. And so it could be just a pause. It could be a bit of a correction or something like that, and then it can continue to move higher from there. It's about just having the fundamentals catch up to where the market is at. We talk about the AI stocks, the tech stocks in the US and the valuation levels. Unlike the tech wreck back a couple of decades ago, this time around, these are very strong companies that have very strong earnings bases. We are pricing in—or the market is pricing in—pretty significant earnings growth, but it's possible that they could achieve those growth levels. In the tech wreck, it was giving hefty valuations on companies that had no earnings at all. This time, we're putting hefty valuations on companies that had pretty strong earnings growth or historical earnings, and prospects for earnings growth going forward. It's just about what are those earnings growth numbers going to look like, and how much are you willing to pay for that now? It does feel like that's a bit extended, but not completely unreasonable.

It's just remarkable when you look at those companies, the Magnificent Seven, and how, as you say, with current valuations, you need perfection. The goals are stretched and the expectations are high, but they just keep meeting them. But at some point, it will just get too hard, and that's what you experience in every correction, right?

Right. And there's a lot of people and clients and money chasing those stocks because it's what we call FOMO, fear of missing out. And so as more money starts to chase these high performing stocks, you're going to push those valuations to an extreme that will no longer be sustainable. There will be a breaking point at some point. We haven't found it yet, but I expect it probably will happen at some point in the next several quarters.

Sarah, if we just stick with equities for a couple more minutes, where are you overweight or underweight within that slight overweight in equities?

Yeah, that's a great question. So when we actually reduced the equity weight last week, we took it all out of Canada and the US, because that's where our biggest concerns are with respect to valuations. And so we took 1% out of equities with half coming from Canada, half coming from the US. And so we are now underweight the US, and slightly underweight Canada, and we are overweight Europe, Asia, and emerging markets, because we think there's better valuations and better prospects, and they're not as expensive in those areas of the market.

Excellent. And if you're not a regular listener, you can subscribe, find us on YouTube and give us a «thumbs up», a five-star review. Dave Lambert, European equity head at RBC Global Asset Management, was on last week and talking about some of the opportunities in Europe and that it's not just tanks and banks as it's been for a little bit. We're seeing a broadening out in the European markets. Kind of interesting. We'll get someone on to talk about emerging market equities in the not-too-distant future as well. So a little bit overweight Europe, emerging markets, Asia, a little bit underweight Canada and the US. So then we go to fixed-income markets. The Fed is making their next announcement next week. It's expected that they're going to cut rates by 25 basis points. A slight chance they might do a little bit more. More rate cuts in the remainder of the year and into next year. We've seen the 10-year US Treasury dropped below 4%—just a little touch below. So it's sitting right in around that 4% level. And you've got, again, the stock markets telling you things are probably okay in the economy over the next 12 months. So how does that fit into the bond market when you're looking at government bonds or when you get out into the riskier levels of credit within the portfolio?

Yeah. We have our quarterly strategy meeting in two weeks, so we'll get an update from the fixed-income team on what we're seeing there. At this point, I’m not seeing a lot of change in the forecast in terms of what you just summarized as some Fed cuts on the horizon. Bond yields falling back down to 4%, I guess, are probably a bit surprising for us. We expect maybe that yields could back up in here, but not significantly. So when we were making the decision on whether we should sell stocks, and if we sell stocks, where we should put the proceeds of that, we decided we wanted to put it into cash. One, because we didn't really want to buy fixed income at 4% yield levels, and also because we wanted to have the cash available to us to be able to redeploy into the market at some point in the future, should, as I said, some of those risks that are on the horizon resolve themselves. Then one of the reasons why we wanted to reduce the equity weight is that there are some early signs in the credit markets of some potential stress. Stress is a strong word. There are some risks on the horizon in the credit market as well that we want to keep an eye on. Fixed income right now is an area where the jury's out on where that might land. We would like to look at government bonds, see how yield levels play out, see what the Fed does next week, but keeping an eye on credit spreads as well.

Yeah, well, for about a year, if you just look at government bonds and you look at the 10-year, there was a really easy trade that you could do. And I know you did it several times where the 10-year just got above 4.5, 4.6, 4.7%—you buy. And then it just drifted back down to 4.20, 4.25, and then sell. And then drift back up and down. And now that we've fallen down to 4, are we going into a new range? Or is this just another example of the uncertainty that's out there in markets right now.

Yeah. Maybe it's a wider range. Maybe it's 4 to 4.5% now. I don't know. And then the other one we didn't talk about was high yield. So we do have some concerns around the high-yield market. We actually have very low levels of high yield within the various portfolios because of that potential risk on the horizon in that market.

Yeah. And then so again, you're left with a situation where you're largely balanced. You are a touch overweight in equity. Are you anticipating that the Fed cuts are going to be a positive or negative for stocks? I guess the market forecast would be two more this year—next week, and another one before the end of the year—and three or four next year. Do you think that's going to be ultimately beneficial for stocks, or is that signaling issues with the economy and earnings that give you real problems with valuations where they are?

I would love to have the answer to that question, Dave. The sentiment in the market is very difficult to read right now because to your point, okay, Fed cutting rates means that they're concerned about the economy, and therefore, they're trying to get out in front of it, and so stock prices should come down. Having lower interest rates is good for stocks, so we should have higher valuation levels. I'm not really sure where we're going to land on that, to be honest. Maybe it's some of that uncertainty that is what's causing us to pull back on the equity weight. There's that saying «this time it's different». The reaction to the Fed over the last 12 months in terms of what they've done or haven't done, or what they've signaled that they're going to do and stuff like that, the stock market has been a little bit all over the place in terms of its responses to the anticipation of the event and then to the actual event. I look at it and think, oh, I really would have expected the market to be down today, and it turns out it's up, so it's done the opposite. To me, that's just a signal, back to our previous conversation, about why we keep those bets fairly tight is because we have a lot of humility around our ability to predict what happens in markets. We keep our risk budget quite small, and we try to be very active with small bets in order to generate the alpha. I think it's Stu Kedwell—he might have stolen this from Warren Buffet—but he has a saying that says: prepare, don't predict. I think that's what he says.

Don't predict, prepare.

Don't predict, prepare. That's what we're trying to do. I'm not trying to predict how the market is going to react to what the Fed does or what the dot plots look like or what the press conference looks like after the meeting. But I'm going to prepare for each eventuality depending on how the market actually reacts to the actual news.

Yeah. And this is what I'm saying to investors and advisors when I'm out—and I'm out talking to them all the time—and you said it earlier, is that focus on the long term is so critical in a period like this. It was a week and a half ago on Friday, the President makes some comments and that takes over a trillion dollars out of the market in terms of valuation, with the move in the markets that day. It might have been closer to $2 trillion. If you're myopically focused on everything that's said every day and the moves—there is that comment on Friday, which takes things down, and then the comments over the weekend that walk it back, and you still don't know exactly where it's going to play out, but the market recovered a little bit. And you need to step back and say, okay, so this discussion that's happening right now, yeah, it could have an impact on the short term, but 10 years from now, I likely won't even remember that that happened, and the market will likely be higher. And that's the way you need to think about investing in the face of this kind of uncertainty. And when single comments, single policy decisions are moving markets as much as they are, you really do have to step back. And as you say, that means you're not going to make a big bet, but you can make some small bets and take advantage of movements in the near term, but focused on how you're going to make money over the long term.

Yeah, I was trying to avoid getting into that part of the conversation, but since you brought it up, it's been very difficult to anticipate the market's reaction to events because of President Trump's ability to move the market and the fact that the market responds quite significantly to when he makes a comment. He makes a comment one day, and he sees how the market reacts. Then if it goes too far in the wrong direction, as it did last Friday, then the next day he comes back and walks back those comments and says, oh, never mind, I'm not doing 100% tariffs on China. Then the market reacts back the other way. That volatility that we're seeing, it's amazing the influence or the impact that a single person's voice can have on the global markets. But that's why it's quite difficult now to predict how markets are going to react to even events like the Fed. To the discussion earlier, we'd rather build resilient portfolios that can generate returns for clients in any type of scenario, any type of situation, or any type of market event. Focus on long-term results. See if we can take advantage of short-term volatility when it presents itself, but keep our bets a little bit more limited so that when we find ourselves on the wrong side of one of those bets, because one of these comments comes out, we are not doing permanent damage to portfolios.

Yeah, and I did not mean to take this particular episode of the podcast down a political road, because we don't do politics here. There are a lot of political podcasts, if you're looking for those, just like there's lots of wedding planning podcast too. So they're out there if that's what you want to listen to. But whether you like Trump or you don't like Trump—and there's listeners I'm sure on both sides of that—you have to look at the presidency relative to other presidents we've had and say, look, it's just more active. It looks like it's tactically more active, that there's more push and pull and there's things being said or done or moved or positions changed almost daily or hourly. It's not that it's new that a president or government can have an impact on markets in the short term or in the long term with policy. That's not new. It's just the hyperactivity that you're getting with this administration which is a little different, and markets, I think, are still getting used to it.

Yeah. And it's also a President who has a particular affinity and interest for stock market, being a businessman as part of his career path, unlike other presidents that we had in the United States that have not had the same interest and the same focus. And so it's just that the stock market and the behavior of the stock market is important to him, and therefore it is much more attuned to the comments that he makes, and he's much more attuned to the market and the impact that his comments have on it.

Yeah. So it's a really interesting environment. But as you say, you take a step back, and I think this is really important. We start to look at 10-year numbers on markets. They're fantastic. We look at one-year numbers. It's been a good year to be an investor in both stocks and bonds. And particularly, I think it's been a good year for people who are invested in portfolios like you manage. And just don't get too focused on the day-to-day movements. Let somebody like Sarah Riopelle worry about that stuff. She's got the expertise, the lifetime training and learning to do that. And just think about, again, long term, where you want to be positioned to have success in your portfolio.

Great. I have nothing else to say. I think you summed it up nicely.

Well, I tried. You clearly came on and you wanted to make sure I was aware that you're under an extreme amount of pressure right now with the whole wedding planning thing, even though you're the mother of the groom, not of the bride. I've got two daughters. I mean, that's going to be tough. The guy just kind of shows up. I don't even know how much you should be involved.

Yeah, it doesn't work like that.

That's not the way it works?

No. Nice try, though.

You see, I'm a little older than you. I remember the old days.

The good old days?

No, the world's better than it's ever been. Don't let the flow of bad news or people tell you it was better before.

I think we're aging ourselves. I think we're going to lose all the young people off this podcast if we keep going.

I think if we keep going, we're going to lose everybody off this podcast. So Sarah Riopelle, thank you very much for joining us for a very special Stu’s Days on the podcast, and we won't let it go several months next time.

Perfect. Thank you.