Transcript
Hello and welcome to Download. I'm your host, Dave Richardson, and it is the first Stu’s days of 2025. I know they do New Year's Eve and all that stuff and fireworks and celebrations and people popping champagne corks. But I really think that people should be more focused on celebrating the first Stu’s days of 2025, because that's when the new year really starts, Stu.
Yeah, we need some traditions that we can add to that. I'm sure we could come up with a song that would give it its proper due, right, Dave?
Well, we could come up with a song, but then we'd also have to come up with someone to sing it. I know my talent in that area. I'm just assuming—maybe I'm making an assumption, maybe you're just a songbird—but I'm thinking you don't have a great voice.
You're bang on. You would not want me singing at all.
Or we could have you with a spoken word part. Those are always exciting. I listen to a lot of progressive rock from the 60s and 70s, with those spoken word parts. It's always interesting.
Could be. Maybe we'll have some podcast like that. We'll have a whole poetry-infused famous quotes from different stock market participants, and I'll string them all together.
What was that one show? It was like a police show, and they sang through the whole show. It was like a musical police show. Anyways, it was critically acclaimed, but I couldn't watch it. I don't want to listen to people sing. Even musical films are tough, I find. The nice thing, though, is I've got my Azorian background here. This special Stu’s days is also our first moose day because I've got my little neighbor cow. If you look over my left shoulder here, you'll see the cow sitting in the background. So that's my neighbor here. It's a pretty exciting place. Now, more exciting is where we are in terms of markets as we head into 2025. We're doing a series, by the way, and this is where I make the marketing folks happy, Stu. Click subscribe. If you're on YouTube, or wherever you get your podcast, subscribe, follow the show. We love to get more listeners, Stu. We were up 500% last year in listeners. Did you know that? They gave me the stats just before Christmas. We're up 500%. And all 500% of them are someone's mother, and they like to listen to you. They'd like me to leave. Anyway, so click and subscribe. So apparently this marketing push I'm doing here is working. Click and subscribe and follow us. Give us a five-star review because our mothers have, and somebody else has to give us a five-star review. And what we're doing here, Stu, is a series of about 15 videos where we're looking back at 2024 and looking forward to 2025 and getting all the different experts from around the world to give their views on that. And I suggested to Stu that we do this. And he said, look, I've looked enough back at 2024. Let's look forward. So we've got a collapsing dollar in Canada. We’ve got a Prime Minister resigning. We’ve got a bunch of tariffs coming from the US. What else is going on there? It's winter, so it's cold and snowy. That never makes anybody happy. What's that day in February where you hit your peak negativity because of all the bad weather and lack of light during the day? So you piece all that together Stu, and how do we get excited or positive, or do we even get positive about this year that's coming?
Well, I think it's an interesting time because we have often said about markets «bad, but getting less bad» is important. Just like «good, but not getting better» is also important. And I think that might be the story for different pockets of capital markets this year. We're starting off on the Canadian dollar, where it's pretty hard to imagine a worse set of ingredients for sentiment. But we're doing it at a time when the currency folks think the dollar, the Canadian dollar anyway, is pretty undervalued. So looking through this environment, is there the ingredients for maybe a better tone as we move into the end of the year? We've got dysfunction in parliament. We've had the tail end of a housing malaise. We have tariffs, as you say. One might be more tempted to think that this is a bit of a crescendo to the negativity. And that doesn't mean that it marks the bottom or that it's up, up, and away. But when we get into these situations, we have to start thinking about something that might weaken 2 or 3% more, but could be 5, 8, 10% higher. We want to start thinking about those from a risk-reward standpoint. So I do think, particularly for Canadian investors, thinking about the dollar in your portfolio is going to be more important. Thinking about some hedged versions, perhaps, of funds is going to be more important. Canadians, in particular, have done extremely well on a lot of US stocks where the US stocks have been spectacular, and the dollar has been icing on the cake. And I think when we talk about bad, maybe not getting worse, we also have to talk about is good going to get even better because some of those stocks have been spectacular. And some Canadians are going to want to think through that in their portfolio as well. We got a bit of a delay in the capital gains component, maybe. Even though it's early in the year, is there the opportunity to think through your portfolio a little bit? I think that always exists.
Yeah. Stu, as you're looking out at the Canadian market, if we're talking about stocks—and we throw the US in this because you're our expert on North American equities overall—what seems particularly exciting to you as we're coming into this year and what are you a little bit more worried about? I know if you look at your own portfolio, you're likely pretty happy with where you've got it positioned right now. Where do you see the real opportunities this year? And how do you have yourself positioned? How do you think you're going to walk through 2025?
I think there's a lot of good businesses out there at reasonable prices. And I think the story will be, is the world economy going to do a little bit better? Crude oil had a pretty tough year last year. Can it have a better 2025? Natural gas certainly has benefited from the cold temperatures that you talked about starting off. But some of the natural gas stocks look great. Can there be a bit of a change in perception in Canada around how we use our natural gas resource. That could be pretty interesting. We had some companies at the end of the year lay out 2- to 3-year plans that look pretty good for their share prices. It might be an airplane business or whatever. You might sit there and say, well, the next six or seven months might be a little bit tougher, but as we get through that, we see some chances for some pretty good returns. This morning, on the Canadian consumer side, Dave McKay, the CEO of Royal Bank, at a conference, was saying every 25 basis points of interest rate decline in this country is, I think the stat was seven billion of discretionary spending that finds its way back in. There's been a lot of worry about the Canadian consumer, but maybe with some rate cuts, there can be some slightly better times 6 to 12 months down the road. Unemployment in this country has been a little bit tough. Maybe some pressures will ease in the back half of the year on that front as well. When we go through a list of fairly mundane businesses, we're normally getting pretty good current free cash flow or current dividend yield. We see the opportunity for growth, and we think we're supported by a lot of asset values. We look through the portfolio and say, to borrow from Warren Buffet, whether or not the stock markets are open or closed, we feel pretty good about some of the businesses that we own in that regard.
Yeah, and as we talked about on many occasions, dividends and Canadian stocks that offer great dividend opportunities, some of them are among the best in the world.
It's interesting. You get to this time of the year, lots of people use the calendar year to go through their financial plan. I was doing something similarly. I've owned the dividend fund for almost 20 years. When I look at the expectations I struck 20 years ago, it's nicely ahead of those expectations. So owning good businesses paying you good dividends, growing those dividends over time. There's never the particular day where you say, oh, baby, that was a good one, but at the end of each year, you tend to look at the plan and say, yeah, we're on track here.
I usually leave this till the end, but I'm going to sneak it in earlier this time. I'm just wondering, when you were looking at that dividend fund 20 years ago, relative to expectations, did you just dump every penny you had right then and then never add to it, and you think it's done better because of that? Or was there a particular approach that you use to accumulate the dividend fund that you own?
My New Year's resolution for the last 20 years has been dollar cost averaging. So I just keep it on the list, Dave.
I know. You think of people going to go to the gym more, going to eat better food, going to do all these different things. And most people fall down on that. Dollar cost averaging, you just make the decision, push a button, forget about it, and away it goes. It just flows in. Then, like you say, you look back 20 years later and you're like, wow, I can't believe that.
Yeah. Got to pay yourself first, Dave.
Well, speaking of that, and another way you get paid is a bond market. I think the general expectation was that rates were going to come down across the board. As you mentioned, the Bank of Canada is cutting rates, and they've been ahead of the US in cutting rates, which has been one of the factors in hurting the Canadian dollar relative to the US dollar anyways. I know when I look at the Canadian dollar relative to here in Europe, it's flat. There hasn't been any move at all in the last year. You look at rates on the short end that have come down, but actually, over the last three months, we've been seeing longer term rates drift higher. We've particularly been seeing that in the US. Now, is that all bad news or is that something you expect? Does that affect the stock market in any way in terms of relative valuation? What are your thoughts on longer-term rates popping a little bit higher than maybe most people expected over the last few months?
A couple of things. The first off is for the bond market itself. A couple of years ago, when rates were rising, that was having a very negative impact on price. And when we get to 4 or 4.5% on the 10-year bond and you start drifting by 25 basis points, it doesn't have the same impact. 25 basis points of 1% is a much bigger percentage change than 25 basis points on 4.5%. So when I look at the bond market and I look at the current coupon you're receiving and I look at the real interest rate that is now embedded, it's not that you say, I don't worry about it, but it seems like there's more protection there than there's been for some time, even though we've been bouncing around in this, call it 4 to 4.75% range on the US 10-year. So I think that coupon protection is a little bit more interesting than in many years past. I think for the stock market, if say the 10-year went up another 100 basis points, or went to 5.5%, that total return basis would probably eat through. Your coupon would pay for the applying in the price of the bond. 100 basis points would likely be a little bit more of a challenge for the stock market. From a balancing standpoint, starting to see some interest in fixed income, I would say that there's a fair amount of bearishness on longer-term interest rates to start the year when you look at some of the sentiment data. It's the reverse of where we start some sentiment data in the equity market, in all honesty. I'm a little bit more favorably disposed towards fixed income.
We’ll get Sarah Riopelle who talks about where she positions her portfolio, and she's been neutral for a while. All those stocks have done very well. Bonds have also done okay. Again, you want to position today for what you think is where things are going to go in the future. Fixed income looks fairly attractive. There are still reasons to be in different parts of the stock market. That seems to be a prudent way to be positioned right now, given where we are with some of the risks that we're going to see coming into 2025—because there are risks there on the table.
Well, you start every year with all the stats that tell you there'll likely be a correction at some point. So you might as well be prepared and think about it a little bit. As I say, there's a fair amount of optimism in certain areas of the stock market. So it's not a certainty, but it's almost likely we see some type of corrective activity this year. We want to be there to think through that and have money to put to work when that takes place. So anytime you're managing a portfolio, you can be neutral, you can be overweight, you can be underweight. One of the things on my wall is Butch Cassidy and the Sundance Kid, which was always a holiday movie that I used to watch with my dad. And there's a move there where Butch Cassidy says, can I move when I shoot? I just shoot better when I'm moving, when I'm thinking through a whole variety of scenarios. That's going to be the case as it always is. It's going to be the case for 2025 for sure.
As we talk about the yields going higher at the long end and then what's going on at the short end with central banks cutting rates and the Bank of Canada being particularly aggressive thus far in those cuts. So we talked about the good and bad, but one of the other good things about that is you've got a steepening yield curve, which is generally a sign of what?
Well, right as the curve goes from inverted to negative inversion or to positive inversion, that's one of the sources of worry, which we went through last year. Today, the spread between the 2-year bond and the 10-year bond in the United States is almost 40 basis points. It was minus 40 this time last year. If you are a bank, if you are a financing company, a positively slope yield curve is pretty good. It helps you make more money. Normally, it means that eventually the economy is starting to respond, and that's why you're getting a positive slope yield curve. So you get some loan growth, you get a variety of things. So it can be good for sure for banks and other things. But it also means that you're getting some term premium. Going back to that area, when we had minus 40 basis points of slope, there was not the same level of concern that we have today when we have 40 basis of points of slope. There is certainly some negative sentiment in the bond market that could provide a bit of a cushion.
Coming out of two very good years in the stock market. I've actually just sent you a chart. You’ll see it in your email in a minute. That basically shows the S&P 500 returns year by year since 1874. As you go through those returns, and it basically splits them up between starting 0 to 10%, 10 to 20%, and it was positive and negative, you start to see there's not a whole lot of time that you have back to back years like we just had where you get a 20% rate of return, and that third year follows through. But it's not impossible. We did see it back in the 1990s.
Yeah, it's always hard to know. When you're getting a chunk of the return that's being driven by multiple expansion versus just earnings growth, it's harder to keep banking on that. In order to have another double-digit earnings or return from here, we would really need a big acceleration in earnings growth. I would be more tempted to sit there and say, I've got pretty good free cash flow yields on a variety of stocks, and I might get high single-digit growth out of that free cash flow growth. And that's the way, even if I get some multiple compression, I'll get an okay return. And acknowledge in advance that it's likely to be a bit more volatile just because of the starting point than it may have been in years past.
Yeah. And we've been talking about that. One of the things that you'll see pretty much all the time is when things get expensive, when valuations are stretched, you see more volatility, which is one of the nice things when you can buy things cheaper, that you've got potentially more upside and you do that with less volatility. Maybe this is the year that Canada finally steps up and starts to compete with the US on a relative return basis. So as you say, just seemingly, just over the holidays, one bad thing after another in terms of news about Canada, maybe that is a sign where you're getting closer to the end than the beginning.
That's right. Although we're at the beginning of 2025. I feel like this is a changing role. This is like me trying to close. I'm a bit of a rookie at this.
No, it's just you confirming for all the listeners why you're the expert guest, and I'm just the silly host who says dumb stuff in between the smart stuff that you say.
That's funny. Well, Dave, all the best in 2025. I'm looking forward to all our Stu’s days. Enjoy the Azores.
And it is going to be a spectacular year of Stu’s days. We just went through all the election primaries last year. But you know what they call that one day? Because they're done on Tuesdays, a lot of the primaries, right? On Stu’s days, where they lump all the big key states in together. They call it super Stu's days.
Super Stu’s days.
So it's going to be a year of super Stu’s days this year, 2025, I believe this is the year of Stu, officially.
Maybe.
A lot of people are hoping for that. So, Stu, thanks again. And all the best to you and your family, too.