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. Let me tell you about Stu, today. We always do a little bit of a prep before we tape the formal podcast. We have a little bit of a discussion. I've got to admit, sometimes we're struggling to find the exact topic that we want to cover. But Stu came in like a pistol today. He's just wired up with ideas today. He's been thinking about a ton of stuff. So, Stu, should I actually even get involved and ask questions or you just want to go?

No, no, you got to ask the questions, Dave.

And I'll go ahead and do that. Stu, let's start with stocks and bonds. Stock market again, a nice little rally. I think next week we'll talk about the US elections, but you were thinking about a couple of things with respect to the conversation we had last week, which is around tops and bottoms. And we were talking last week about whether this rally is real. How do we validate whether the rally is real? But everyone's trying to figure out when are we at the bottom of this particular pullback on the stock market? And you have some thoughts on that in terms of, there's just not going to be that sign. So how should investors be thinking about that?

Well, I think it's a great point. We just spent an hour before the podcast with a great US market technician who always has great observations about the market, and many of them are rules of thumb. There's always plot twists along the way. We've had a pretty big bounce in the last, say, five or six trading days and even, the Hang Seng, or the Chinese markets that were quite weak on Monday. And sometimes you'd say, well, if you saw that weakness, it would overflow to the S&P. And it really hasn't. So this notion of tops and bottoms, there's a combination of the price change and there's a combination of time and maybe a rule of thumb is: two thirds of the price changes in a third of the time, and one third of the price changes in two thirds of the time. We had the levels of June a couple of weeks ago. Were those the lows? Time will tell. As I say, there will be plot twists along the way, but within the side of the market, some of the things, people are all focused on recession and the likelihood that there will be one. Are we in a recession? We've had a lot of discussion around that on the podcast, but yet at the same time, especially in the United States anyways, financial stocks have been better, industrial stocks have been better, and these are not the stocks that typically do well on the precipice of a major recession. And there are some views out there that the Covid boom was quite quick and the Covid bust might be equally quick. So that gets you into this, how earnings might bottom. And there's been some stocks that have gone up in bad news, which we've talked about as being an important ingredient as well. A couple of things there, a lot of people look at the financial crisis, and when they see a bear market— because we haven't seen it in a long time, people naturally go back to the financial crisis— this seems, in our minds anyways, really different. Balance sheets are in much better shape. There are some stresses, but they're not stresses inside of financial stocks, bank stocks in particular, and corporations, the way we saw back then. So when you're doing your earning sensitivity, it feels like there's a better understanding of the goalposts, which is quite helpful when stocks are down a long way and you can start to say, well, what could recovery look like? How deep will the downturn be if there's a recession? As they say, many people think we're already in one, but that seems a little bit more quantifiable. Last week we had what they call the Fed whisperer, at the economist at the Wall Street Journal. The Federal Reserve will whisper— and that's my best job at whispering, Dave. Someone in the Fed will whisper to this Wall Street Journal economist and then that article around lunch on Friday saying, after the next Fed meeting: will they start to consider how they ease off on some of the tightening? We've put a lot of tightening in, so should we ease off a little bit and just see the effects of everything we put in? And that triggered a real rally in the stock market. When we get into these types of rallies, there can be gaps; just as there are on the way down, there can be gaps on the way up as well. There's an absence of selling. People are positioned not for the market to go up. You get some scampering that goes on trading desks and you get big moves like we've seen in the last couple of days. In a bull market, you tend to look at where support levels are often. When there's a pullback in a bull market, it will pull back to support and then rally from there. In a bit more of a corrective market, like we're in right now, then you look at resistance. And that's maybe still 3 or 4% away from these levels, but that tends to be areas where the traffic might pick up again. So we'll have to watch as that progresses. I think we mentioned, two standard deviation moves last week, the number of stocks that are above their 200-day moving average; at this juncture you would say that type of support is not yet present. So, to get a really good bull market, like a real thrust, you'd see that the number of stocks above their 200-day moving average might be greater than 40%, and we're still in the 25% range. We look for a lot of stocks; do they get above their August highs? Those are some of the things that we're looking for on that front. Seasonality is helpful here. There's lots of tea leaves that everyone's reading to try and negotiate the short term, but I think from a longer-term standpoint, have we seen the low? I don't know, but the internals of the market are a little bit more suggestive that whatever is in front of the economy may not quite be as bad as people are thinking.

Wow. My wife sometimes criticizes me for occasionally exaggerating, but I certainly didn't exaggerate that you're just a ball of energy today. You got a lot of stuff going on. That was a lot of interesting things there. I want to drill in on a couple of things you said though. One was, early in what you were talking about, which is this idea of the two thirds of the move happens in one third of the time and one third of the move happens in the other two thirds of the time. Is it typical that you see those two thirds of the move in one third of the time coming off the bottom or coming down from the top? And is that one of the elements that makes markets so difficult to time?

It is. It's a bit more true for a decline, although even when markets come off the bottom, you tend to get a very explosive period. Thankfully— not just in this case, but almost in all cases—, bull markets last longer than bear markets. Bull markets tend to have that initial thrust, then a period of debate and then a more lengthy expansion. Bear markets tend to have a concern and it causes deleveraging. That deleveraging might be because people have borrowed money; it might be because they're worried. That can be quite quick. The thrust off the bottom and the decline, the initial phases tend to both be quite quick. But bear markets in general are faster than bull markets. My partner Doug would say bear markets end with mathematics. So you can frame an earnings story, you can see the dividend yield you're getting. You can say, well, I don't know exactly when this turns, but this is good enough for me. And then, people are out with their catcher’s mitt and they're collecting stocks and they're saying, I don't know if this will be 12 months, 24 months, whatever, before recovery, but I'm going to make good money. And quite often when you're in that process, it ends up happening faster than you think.

Yeah, well, I'm doing a set of speeches right now. I was in St. John's, Newfoundland last night, Halifax today, doing the coast to coast tomorrow, going from Halifax to Vancouver in one day to do an event tomorrow. And one of the charts that we've got in, and I think we covered this about three, four weeks ago on the podcast, is the bounces from the last four bear markets in the first month. And the ones that stand out is the 2008-2009 event. And markets were up in excess of 25% in the first month coming out of the March 9th, 2009 bottom. Similarly, you had an over 20% bounce out of the bottom the first month out of the Covid drop, which was a 35% down draft. And then, of course, we had the big jump up that first month, and then it carried on through to earlier this year when we've had the pullback. So, one of the big takeaways as I'm talking to investors is this whole idea that back then— the easier one to remember is the Covid bounce, but if you think of late March 2020, it's only really March 12th and 13th, which is when it's announced that international travel is stopped, that the lockdown is going to stay, so really, it's just two and a half weeks later; that was the bottom—, you needed to be able to figure that out and be there to get that excess of 20% bounce in stocks, even a balanced portfolio bounce of 10% off of that bottom. So it is one of those things where when that bounce happens, we can look back now, a couple of years later and say, oh yes, of course that bounce was going to happen, but it's very rarely just sitting there right in front of you, that that bounce is going to happen. And you need to be there to get that bounce, to get all the benefits of holding stocks over the long haul.

100%, and I know you like your drinking game, but the dollar cost averaging… Once you're into the final third of the time, is just an outstanding time to be dollar cost averaging.

It absolutely is. And I actually wasn't thinking of the drinking game. I was thinking of how I came with some energy, too, Stu. So let's move away from stocks, because a lot of the investors that I'm talking with as I'm traveling, as we've said many times before, stock investors get the ups and downs of the stock market. What's been really tough this year is the bond market. And you were just, again, in some of the discussions that you've been having today with your colleagues looking at the bond market, and just a way of thinking about how some of the value has built up in the bond market as rates have risen particularly over the last six months, but really over the last two years.

A couple of things that stick out about the bond market in terms of indecision and volatility is this notion that more things can happen and will happen. And many of the listeners have not enjoyed the volatility in stocks, which gets a lot of attention, but the volatility in the bond market has been about twice as much as the volatility in the stock market. When volatility is high, that's normally when you have indecision. And when that volatility is high, that's a great time to start looking at something. So the change in the bond market— and I'm a little bit out of my depth here because I'm not a bond guy or a fixed-income person—, but what you see in the bond market today is a level of coupon, cash payment, that is as high as it's been really in 15 years. We haven't seen this level really since pre-financial crisis. So you have the absolute level of yields that come to you from the government, and then on top of that, you add in spread for corporate investment and more spread for high yield and so forth. And while the spreads are at- or a little bit above average, the absolute level of coupon yield available is at pretty good levels. So even as an equity investor, when you think about the path forward, if a high yield, a bond fund is yielding 8 to 10%, that's not a bad starting point. That 8 to 10% is designed to pay for the odd company that goes bankrupt and what have you. So even though spreads are not at extreme levels, the absolute levels are more interesting and it backs down into the rest of the yield stack. So even if I was looking at a ten-year bond today— yesterday we were at 4.25, but we're a little bit lower today— but if I buy that bond for $100 and I get my 4.25, even if a year from now interest rates are up another 100 basis points, which would be pretty significant from these levels, my total return on that bond is not too far off flat, because the coupon starts to pay for the price decline that would take place in that. Yet, if inflation is peaking, as we believe it is, and sometime in the next six to twelve months, the Fed and central banks will take their foot off the accelerator on interest rates, go flat, perhaps even begin to entertain a cut at the end of next year, that bond might be 3.5 or 3.25, in which case you would collect your coupon and you would get an accelerant of the price improvement that you get from that bond. So I would say increasingly, when we're having discussions with pretty good market observance, the question is increasingly coming around to the interest in the fixed income side of the equation. Not just positioning the portfolio on the equity side.

Yeah. And the one thing, it's been tough for fixed income investors this year— but what it does set up as we start to look forward, and we always talk about investment decisions are made every day— holding something is a buy decision, right. So if you're holding an investment, you're making a decision every day whether you're going to continue to hold it. So we're talking about today and forward and for so many investors who are in retirement or moving into retirement, who have been worried or concerned or disappointed that yields have been so low for so long, that what you would earn on cash or cash equivalents has been so low, you now have a chance to sit down with the money you've accumulated through your life and rethink how you're going to drive income off your portfolio because the opportunities have changed so dramatically. Just really in a six-month period— certainly over two years, but really over the last six months—, a great time to sit down and get advice from a good adviser on how to structure that income and take advantage of rates where they are today to make sure that your living expenses, your lifestyle expenses and even what legacy you might leave off your retirement is going to be in place. As you say— we talk about stocks and bonds, that or a balanced portfolio—, the opportunity to dollar cost average is always a good thing to think about where there's still quite a bit of uncertainty in markets, but there's a lot of good things to talk to your adviser about right now to get yourself positioned for where we're going forward. You've come in with so many different interesting things, particularly in today's podcast, to highlight where that conversation can start on the equity side and the fixed income side if you're an investor. So Stu, wow, that was fabulous today. A really good Stu’s days.

Thanks very much Dave. And I'm going to call your trip the Bobby Orr trip. Coast to coast.

Coast to coast. Number four, Robert Orr. Excellent. Well, thanks Stu and we'll see you next week..

Safe travels.