Hello and welcome to The Download. I'm your host, Dave Richardson, and it is everyone's favorite day of the week, Stu's Days. We are joined by RBC Global Asset Management's Global Chief Investment Officer. And we say that with a very round «global» because it's all over the world that he operates. So we now developed many features, Stu, as you know, off of your name. Your name is very useful. We can do a lot with it. Can't do a whole lot with David. But we did the Stu's Views on the News, which I got a lot of great feedback on from listeners. So, they like that. Today though, we're not going to do Stu's Views on the News. Ask me on the road, and I'll tell you the story about Stu's views. We're going to do the Investment Stu today because there's just so much going on. And as we were talking before, Stu and I always take a few minutes to chat over what we might talk about. We like to let the conversation flow and not have it overly prepared because I think it comes across a little better for people listening. But I was just looking at the market today and looking at a few things, what's going on with yields, what's going on in the AI space. We've got elections. We've got a whole bunch of things going on. It just seems like everything's coming together here, as it often does in September— I think the word I wrote down was we're at a crossroads on a number of fronts. And you were out doing a big speech this morning, sharing general views, just what you were talking about this morning, it just reinforced exactly that, all of these different things. It could go this way, it could go that way. When you come to a fork in the road, take it, I guess, is the old Yogi Berra saying. I know you like your quotes. But that idea of the crossroads resonated with you. And so, when you were over talking to the big group today, maybe we'll start there.

Yeah, we went in a number of directions. So, hopefully, you find this Stuseful.

That's for Stu's mom, by the way.

Interest rates receive a lot of discussion— it's interesting to me anyways— the amount of discussion that interest rates receive when the 10-year is 4.75 to 5% versus how much they received when they were 1% or 2%. The yield market in the last couple of weeks has gone through the Secretary of the Treasury Bessent making some adjustments to how the Treasury might issue bonds and also, in that process, buy some back, which gave a jolt for a couple of days to the 30-year bond. But a lot of market participants were suspicious because they prefer big macro figures like interest rates, currencies, whatever, to find their own levels, find them on themselves. And a couple days later, there was a noted editorial from Stanley Druckenmiller, a great investor over time, saying just that, that yields should find their level. Nominal growth is very strong. There's a lot of issuance. And yields should just be left to find their level. And then that led into Kevin Warsh in Wyoming, his first speech as Fed chair. And he highlighted that inflation was not back down where they wanted it and that he was focused on that. And there's been all sorts of debate around should the Fed raise interest rates? We had a weaker payroll last month. We'll see what we get this Friday. There hasn't been a history of raising rates with 2-week payrolls. But the inflation data still is humming, and the economy is doing quite well. So you can make the case in both ways. That has created some tension in the near term in the interest rate markets. Meanwhile, real interest rates are attractive— we've talked about this. The move in interest rates recently hasn't really been driven by higher inflation premiums. It's really been a function of supply and demand. There's been a lot of artificial intelligence CapEx go out the doors. We've talked about in Canada how we have this big investment summit coming up. Alberta put out their list of projects. Canada has their list of projects. Projects take money. Money needs to be raised. Not that Canada's projects are causing pressure, but around the world, people are talking about CapEx. And CapEx takes money. So that requires issuance, with fiscal deficits, all sorts of things. So you have a point in the interest rate environment where real yields are attractive. That doesn't stop rates from going up or down. But if you're buying them and you're holding them for a long period of time, you're going to actually get paid above inflation to own them, which is interesting. And then the one thing that also receives discussion is that in both the stock market and the bond market, the probability of recession is priced very low. So when you think about markets, if you went from a 5% probability of a recession to a 20% probability, that still means there's an 80% chance that there's no recession. But that would cause some fluctuation and volatility in markets. So when we look at fixed income— and we talked about the teeter-totter last time— the benefit that you could get from having fixed income in your portfolio should there be a slowdown is more interesting. The real interest rate's attractive, the absolute coupon's not too bad. All of that doesn't stop things from moving around. The last thing too is that when things move around, when you start with a 5% coupon or a 4.75% coupon, the price change is smaller in the grand scheme of total return than it was 3 or 4 years ago. That's what we talked about on the interest rate front. On the economy and earnings front, earnings have been really strong. That has been very macro or CapEx-driven. The consumer side of the economy is meandering. Last week was a big sports retailer. Even though you'd think the market would maybe have figured this out, but all the shoe companies had very bad quarters. And then the shoe retailer had a bad quarter, not surprisingly. But you wouldn't say that the consumer is the driving factor of the earnings stream. It really is more CapEx. We had NVIDIA report. An interesting data point was the quarter was quite good. The guidance was quite good. The stock reaction on the day was quite good, and then it has given back a chunk of it. So it's stuck in this range. And one of the figures you can look at is what they call credit default swap, a fancy way of saying the interest rate spread that they would borrow at. And that really didn't budge. You would have thought, on a strong quarter, maybe it would narrow a little bit, but it didn't really change. You mentioned the word «crossroads». Interest rates are attractive, but there's not a concluding event that says it’s time to go lower. Earnings have been strong, but there's all these discussion points and there's no conclusion to those discussion points in the near term. Bank stocks in Canada reported good numbers, but not spectacular relative to expectations. Investors will often look at what happened to estimates going forward. And those estimates didn't really rise for the first time. So robust, but stocks have been strong. Is there going to be reacceleration? How's that going to move forward? So we've had all sorts of news without anything being necessarily conclusive.

Or resolved. And teetering in that area where it could go one way or the other. And that would be an important move if it happened. If we go back through all the things you threw into the stew there, the first thing around interest rates and the whole involvement of the Treasury Department and a new head of the Federal Reserve is interesting because it seems like the market is trying to sense out what this administration and then what this head of the Fed is really going to do, that they really haven't carved out a very clear image for themselves and reputation for themselves— or maybe they have and it's the wrong one— but it doesn't seem like markets are really that clear in the sense of what they're going to do.

That's 100% fair. It's in the too-early-to-tell camp. Sometimes when you have an event, the anticipatory stress can be greater than the actual stress. So the market is of the mind frame of, well, if we knew they were going to err on the side of slightly easier policy, then we could take gold and commodities and we would know what to do with that. But then if they're going to be stricter, then that changes the calculus a little bit. And I think you're right: there's a lot of discussion and this is all very near-term oriented stuff that people are trying to figure out.

Yeah. And then as you mentioned, you've got the midterms coming up. And that's a whole other kettle of fish in terms of where that takes things. And we've had a lot of noise out of policy south of the border. And it likely gets noisier post the midterms.

Yeah, 100%. And then added on to the mix, you have seasonality. I used to work with a guy that said, buy when it snows, sell when it goes. And you're like, well, how does that work? But like anything that occurs frequently enough becomes part of the discussion. And September has been a tougher period of time.

Well, if you think about all these issues that we've talked about that are coming to that crossroad or fork in the road, however we want to describe it, the one thing that's not there to the same extent is earnings. And that's been the one thing that has been incredibly powerful. And then as you say, well, we've got these companies reporting and we look out over the next 12 months— and the market's always looking forward, the long nose of the markets, as you would say. But then when they start to add guidance and give a glimpse of what goes beyond, it's a little murkier than maybe it's been over the last year. We've come a long way so fast in so many areas that maybe a nice little stop and pause here is not an unhealthy thing or an awful thing for where markets get long-term.

Yeah, the market's valuation has contracted. There's a little bit of the market wondering, if earnings were durable and accelerating, the valuation expands. When earnings are strong, but people are unsure about the continuance, valuation starts to contract. That's the market's way of trying to handicap how earnings will develop over time. When so much has been due to CapEx and the expectations are still quite strong, that the market has tried to say, well, let's just put a little bit of risk, or let's account for a little bit of a risk in that function. And I think it's the same thing where NVIDIA guided their revenues up meaningfully, yet it's not like the stock matched. So people are just saying, well, how long? It's just human nature to get long into something and say, well, how much longer can this last? I think you have to remain quite open-minded. Then you have to try and go through the market and find the streams of cash flow that you think are durable and do have growth in a variety of different instances and don't have maybe competitive threats or margin pressures or what have you.

That tends to lean you back to, potentially, an area that you love, that is dividends.

Yeah, because dividends give you all sorts of benefits. One, when interest rates are low, people tend to be very excited about growth, and they tend to pay a lot for growth that's farther out. And as you raise interest rates, the discount rate, just like if I told you I give you a dollar, 10 years from now, you'd pay me one thing if interest rates are 1%, but you wouldn't pay me as much if they were 5%, just from the discounting mechanism. So growth stocks tend to get impacted a little bit more by changes in interest rates. Versus dividend stocks, people sometimes migrate there just because you're getting that cash payment today. And then the second thing is obviously you can live on the cash payment or inside of a fund, it gives you this pool of capital to allocate to different opportunities. Sometimes when we think stocks are really cheap, we'll have the dividends on what we call reinvestment plan. So we automatically buy shares in the same company. But most times we're collecting the dividend and then resprinkling elsewhere in the portfolio to opportunities that might look even more attractive.

You could almost describe that, if you were just sprinkling something occasionally, maybe once a month or once every couple of weeks and adding it to the base of your portfolio instead of shoving all the money in all the time. We haven't talked about it in such a long time. I think you used to talk about it from time to time. You used to even wear a cape.

Dollar cost averaging, would that be it?

You got me again, Stu.

Well, obviously, the two of us are in the same camp, but it’s just a wonderful way when we spend so much time dissecting and discussing short-term events. Around a given period of time, a good investor has maybe a 60% batting average. And then one of the real keys to being a good investor is changing your mind and how you deal with mistakes. But when you're putting capital into work over a long period of time, your odds increase. So if you're dollar-cost averaging, through the cycle, you're getting a good price. If you're doing it into something like dividend stocks, then you're getting further dollar-cost averaging. And inside of the portfolio, hopefully we're taking from stocks that have maybe run a little bit too far and also resprinkling. So there's 3 or 4 different options available to help you over the longer term. And when you think about your long-term portfolio returns, obviously you have earnings growth, you have dividends, and hopefully you get some additions from some of these tools that are at our disposal. And they really help smooth out the volatility and half the battle when things are volatile is for you to sit there and say, I've got tools I'm using to help me with the volatility versus the volatility is taking advantage of me.

Yeah. And we have some fun with the dollar-cost averaging thing just because I know Stu's so passionate about it and I am as well because it's just such an effective way to invest. But it is serious in terms of, you see when you come through a period like we've come through over the last couple of months where if you look at the market measure of volatility, it's been fairly stable. But in different pockets of the market, you've seen that volatility. And then again, you're at a point where you might say, well, I'm at a crossroads. I'm not really sure what I should be doing here. If I've got a regular investment program, I don't even think about it. Market goes down, I get a little bit more of what I'm buying. Market goes up, I'm happy. Market continues to go up. But as you say, as things ebb and flow, it's a great way to stay committed to a plan and to stay invested and to avoid the emotions around those big moves, the things that make you take decisions that you later regret potentially. And that can be up or down too in terms of getting too exuberant or too negative. And the dollar cost averaging just keeps that approach really smooth and nice. I know with a stock that we both love that I've been buying on a dollar-cost averaging regime over about 35 years now. Whereas I look at other stocks or other investments that I have and think about them in terms of the day-to-day and the short term, whereas the stocks that I buy on that regular investing plan, I almost disregard the short-term movements because you're just continuing to buy in the background. Goes down? Okay, I'm buying more. Goes up? Oh, that's great, I'm happy when it goes up too. And it just manages behaviors. And if I look back, that might be my most successful investment. As we've talked about a lot on the podcast over— and this is what we highlight sometimes as the difference between a professional investor like Stu and someone who's managing their own portfolio, they might be a very effective investor, but it's that management of emotions and staying very objective around the decisions. There's a process, we stay objective to it. And dollar-cost averaging is a way for investors like me— I'm not a professional investor like Stu— of managing the emotions that lead to me making mistakes. And sometimes those are those little tricks you have in the background. What do the kids call them? Hacks? That help you generate better results.

Yeah, it just helps you stick to the plan. Back to your financial plan discussions with your advisor, small changes, nothing drastic. Those really tend to pay off over long periods of time.

Yeah, and I think one of the things about rates moving where they are, and again, being real rates moving higher, is it's great for people who are using bonds. And if I look across Canada, you're pretty balanced portfolio if you look at Canada across the board. It's almost 50/50. So there's a lot of people who have bonds and who rely on bonds in retirement for income and those higher rates and those higher yields and certainly, the fact that you've got real interest rates that are positive, that's a positive for them when they're living off their portfolio in retirement. A lot of people who are listening to this podcast, they're not just there for the growth, they're living off the income and figuring out how to make sure that they're optimizing that income flow to optimize their lifestyle in retirement and this is a positive for them.

Yeah, that's why we really try and look at that real level of interest rate and we made a strategic shift in the equity allocation a number of years ago when real interest rates are really low. And now they're back towards average and average means you're earning a couple hundred basis points more than inflation. And what that implies is that year in and year out, when you're getting a real rate, if you're at the groceries, you could buy 2% more groceries versus for a long time, you could not get the same. It was costing you. So the purchasing power of your money over a long period of time is one of the key benchmarks that we really focus on.

And Stu, you've got kids going back to school. I've got kids going back to school over the next week. This is such an important lesson to teach your kids, and that is to start early and invest for growth. Because you want to grow your money. The reason you invest is to grow your money ahead of the cost of living or ahead of inflation. I know in my house, Stu— maybe it's different in yours— we haven't necessarily been that strict on the responsibility of managing your own budgets and such. So, we work as the bank of your parents. And so, the kids sometimes miss the increases in costs associated with living. Just eating, paying rent, those things, car’s insurance. And so, maybe that's a fault in ours in terms of our approach to parenting. But it's really important. Because they don't teach a lot of this in school unless somebody is in a business program. But making sure your kids understand the value of investing, the value of saving, and that regular investing, even if it starts with just a few dollars a month, like getting invested in something that's going to grow over the next 50, 60 years. Our kids are probably going to live another 100 years. Making sure that they're keeping up and keeping ahead of the increase in the cost of living.

No question. Preserving and growing the purchasing power of your money is one of the key focuses of a portfolio.

Yeah. And if they are paying their own tuition, which my kids aren't, well, we did a good job. We were saving in the RRSP. That's how we would have saved for it. But nothing's gone up a whole lot more than the cost of tuition over the years. So that's one great example. But those lessons that you can teach your kids. Or have them listen to this podcast. As they go off to school, get them a free subscription to the Download and get them listening to Stu's Days anywhere that they listen to their podcasts. And hey, I know the kids like the videos. We're on YouTube. Now, we're not quite as cool as most people on YouTube, but maybe serious elderly folks would leave a better impression with kids around finances anyway. So, we certainly give off that vibe. So, Stu, thanks again for stopping in. I know you're super busy this week, but it's always great to hear from you. I always learn a lot around what's going on. And I know we are so in sync in terms of this philosophy. It starts with the plan, then you stick to the plan, and things you can do to stick with the plan and invest wisely, it just makes such a difference in your life. And I think that's one of the reasons I'm so glad we do this podcast every week because I think for the people listening, we give them a lot of great advice to help them invest better. So thanks a lot.

Great. Thanks for having me, Dave.