Hello, and welcome to the Download. I'm your host Dave Richardson, and it is Stu’s days. So, you know what that means. That means we've got Stu Kedwell, co-head of North American Equities at RBC Global Asset Management. And, Stu, I understand you're quite focused on the Stu Jays right now. A lot of fans of the Stues right across the country. Why are you so excited?
Well, the Stu Jays are going to make the playoffs— or they're in the playoffs—, and they're going to host it in Sturonto. So how can you not be excited about that?
Well, yeah, and the baseball season is, I think, a perfect corollary for dollar cost averaging because the baseball season is slow and steady over time. If you do the right things, you win. That's the Stu Jays heading to the playoffs.
That's right. It's interesting, as a bit of an aside, but Moneyball was a great book written about baseball, and there's a lot of overlap to investing about just constantly putting the odds in your favor. And then the baseball team could use that type of analysis to win the regular season. But sometimes it didn't work as well in the playoffs because in a shorter period of time, some of those statistics don't benefit you. Kind of like heartbeats talent maybe in a playoff series, but in the long term, talent wins out. And we've seen a volatile couple of days that might look like a playoff series, but that long-term investing style of just constantly putting the odds in your favor is extremely beneficial.
Yes. Shorter period of time, lower probability that the best team wins. The longer you stretch it out, the more chance the best team wins. And the best team, from an investment perspective, has historically been equity markets. We'll cheer for the Stu Jays and the equity markets because they're bouncing back. We've been a couple of weeks off, Stu. Let's go through sort of this hopefully bottoming out process that we saw last week or at least coming back down to where we were in June, and then these first couple of days in October have been quite spectacular in the rebound. So what was the final draw in pushing us back to where we were early in the summer?
Well, since we last spoke, probably the biggest issues have been in some of the macro markets, the currency markets and global bond markets. And when you get into situations where liquidity is the most discussed subject, you're often due for a reprieve because liquidity can be quite acute and then there'll be some event that solves it and things go back a little bit towards normal. So, we'll see how this plays out, but the bank of England came in and reversed or said that they would buy some of their long bonds, and that to relieve some of the pressure that was taking place on a liquidity front from a variety of investors. So that was the first positive. The US dollar then weakened a little bit. Today we got some employment news which suggests that the employment market is not quite as tight as it used to be. It's the job openings statistic. And for the first time in the pandemic, really, the number of job openings fell. So now, the number of people looking for work and the number of jobs being open are closer, which would be a very early sign that maybe wage pressure also has peaked. So you've seen a yields drop. This notion, which we've talked about before, is that everyone is looking at the Fed for some sign that the interest rate tightening would begin to mature. Lower inflation is important. The last element of inflation is likely wages. This would be somewhat supportive of that. With this notion that the Fed maybe doesn't have to go as far, we can get back to focusing on the future, we can get back to focusing on company-by-company analysis; that's what you were seeing in the markets in the first couple of days of October. Whether or not it persists is a million-dollar question. But without a doubt, valuation is slightly more supportive. And as we said last time, every so often you're showing the sniff of what it looks like, if people think the Fed is done. As a long-term investor, you know that eventually they will be done. So you know what's coming. As a shorter-term investor, there's been fits and starts, but there is a little bit of improvement on that front.
And encourage the listeners. Most of our listeners are in Canada and it's been said that the one economic figure that every Canadian can quote off the top of their head virtually any day, if you walk up to them on a street corner— and I include my two teenage daughters who are particularly in tune with this—, is the Canadian-US dollar exchange rate. You walk up to any Canadian and say: what is it today? It's $0.73. As we're recording, 73 and a half cent! But what hasn't been noticed through this whole last six months is how extreme the move has been in the US dollar relative to other currencies. So now go and look at your Canadian dollar versus the euro, versus the pound, versus the yen, and the first thing you want to do is actually hop on your favorite travel site and start booking a vacation there. But it is incredible how much the US dollar has moved. And because the Canadian dollar has moved about 7 or 8% down relative to the US, the Canadian dollar has gain against a lot of other currencies. But in aggregate, that US dollar strength and the powerful move, and how violent the move has been, has really created some of these issues in economies all around the world. We focused on the UK and the particular problems there. We'll have a guest on later this week that will get into more detail on that. But when you have currencies moving around as much as we've seen this year, that's normally a sign that there's instability in the market. As Stu says, it can create liquidity issues and it typically creates volatility in other parts of the market and that's exactly what we've seen. So Stu, we talked about technical analysis a little bit. This is not going to be a university level course on technical analysis, but just as a base, typically what happens as a market bottoms or comes down as we did in June, we put some lows in, we get a bounce off of there and then usually the market will come back and retest that low before moving higher into the future. We basically bottomed down in June. We came back and tested those lows, even went a little bit through them to the end of September. Does this feel like that's a bottom or are these earnings that we're going to see coming up in October that you've talked about many times hasn't really been reflected necessarily? Or is it not sure how it's been reflected in the pricing of equities? Is that the next shoe to drop if those earnings are really good or disappointing?
Well, that's a good question. Nike reported last week and those numbers were soft and the stock was down quite a bit. The valuation of Nike had already changed quite dramatically from its highs, yet the stock still was down on the day. So, trying to fully understand exactly where the market is relative to expectations is a challenge. And often the actual arrival of bad news can cause a little bit more weakness. But the other side to that is what has probably been the most discussed phenomena: analyst expectations are too high relative to what we're seeing in economic statistics. So my tendency is to believe that investors are prepared to some degree for that. And even if there is more weakness, that's the type of activity that people are looking to use to put money to work.
So, Stu, would there be a sign, as we go through this earning season for investors, if companies report and the reports look like X, that suggests that the market has somewhat bottomed out or that we still might have further to go down?
The major signs, unfortunately, are still macro-oriented. The confidence that the Fed is closer to doing their full extent of tightening is probably the most important feature because if earnings are a little bit weak but people think the Fed is close to being done, then they are more willing to look through weak earnings. If earnings are weak and people think the duration that the Fed is going to have to hold tighter liquidity is higher than they are less certain that we've seen the bottom of earnings. So that's the dynamic that I think is at play right now. The one thing I would say is that when we have this much discussion about macro events and this little discussion about company specific events, we're normally closer to the end than we are at the beginning. And any investor can go back and revisit notes that they may have made to themselves. Like I keep a daily notepad, a journal, and when your notepad is filled with company specific stories, you're normally optimistic. And when your notepad is filled with macro events, it's normally a period of pessimism. We're in that right now. To borrow from the baseball: one inning? I'm not sure, but it's past the midway point and eventually the macro dominance in the news headlines will start to ebb and investors will begin to focus more back on some company fundamentals and what management have been using this period of time to better the prospects for long term investors.
We're going to have Eric Lascelles on talking about some of the macroeconomics. We've got the jobs report coming later this week— that'll be an indicator. But are you having any more confidence that the Fed is done or is looking to change path given what we've seen in the UK and with a couple of banks in Europe? Anything tweaking your interest there?
Yes, for sure. There were some periods last week when you’re seeing very significant movements in some European financials, when you're seeing the ten-year bond, which is very liquid, moving ten or twelve basis points at a time; that means that the system is tight of liquidity. And when you're in those situations, you're closer to the end of tightening liquidity than you are at the beginning of it. Does the Fed need to go another 75 basis points or another 75 and then a couple of 25 on top of it? Those are kind of market expectations. But I think we can say with some degree of confidence that three or four months from now we'll likely be through it. During periods of illiquidity you get big price movements, so you always want to have some money to put to work in that. But also, in the back of my head I'm thinking how do we come at this trying to be constructive? Because price change has been quite significant and we know that this is where long-term seeds get planted and money is made.
Yes, as I think I've mentioned on a couple of other episodes, I've been doing a lot of work with realtors recently, doing presentations on economics and markets, housing market, interest rates, that type of thing. And the analogy that I've been using, which I think I've shared with this audience, when the Fed didn't do enough last year: it's akin to me and my wife and our two teenage daughters and how do we punish them if they do something that we're not happy with. Well, we take the phone away for a week. But if we don't take the phone away when they do whatever we didn't like again and again, then dad and mom lose their credibility. So, the Fed, back in June, when they went up three quarters, and Bank of Canada did massive increases— three quarters and three quarters again from the Fed and more to come— they've reestablished their credibility. Mom and dad are taking this inflation issue seriously. They're going to deal with it just like mom and dad have to deal with the kids getting offside. We may take the phone away to really prove our point for 30 days instead of 7 days, but the big thing, though, that mom and dad don't want to do is smash the phone with a hammer, because that's counterproductive. And that's what we got worried about: the Fed doing a little bit too much. And it seems like markets are starting to get a little bit more comfortable that things are starting to play out where the Fed is going to have an exit. And if that causes a recession, it's not a mistake that's catastrophic in some way.
I think that's true. The other thing, too, when you get big price movements and people are talking about liquidity, that means that people are being forced to do things. With behavioral finance, we always have the mental angst of watching things we own go down relative to their long-term prospects. But when we see some of the action that we've seen in the past, it's because people have to sell. They've used leverage. They find themselves in positions that, you might hear, require more collateral. That means I need to put up more money. I need to get that money from somewhere. When you begin to have those discussions, you don't know if you're totally in the 9th inning, but when you're in a situation where those discussions are taking place, people are having to act in a manner that they would otherwise not want to. And that's normally a time when a long-term investor who doesn't use leverage— like we don't—, wants to come in and say, I think this is probably the beginnings of a good set up for the intermediate term.
So, are we going to see «dollar cost average boy» making an appearance at the Stu Jays playoff game?
That's right. It will be me and the birdie, so I will have my cape on. And dollar cost average is akin to lots of singles. You just spray the ball all over the place and eventually you get some runs. And we're big believers in that, for sure.
Okay, well, we'll look for that as we're watching the playoffs. And Stu, always great to catch up with you. We'll talk to you next week.
Great. Thanks, Dave.