Hello, and welcome to The Download. I'm your host, Dave Richardson, and it is a beautiful fall Stu’s Day. Are Stu’s Day's better in the fall? What's the best time of year for a Stu’s Day?

I love the fall. I'm a big fall crisp bear. I'll take it all day long.

One of my favorite books I used to read to the kids when they were little, it was called All For Fall. Even to this stage, even though they're in their teens — one of them is 20, now — I still walk around this time of year, and I say, I'm all for fall. It's my favorite time of year, too.

I'm alone in this, but I would take the coldest day of the year over the hottest day of the year.

You see, that's where we're similar. And we take lower interest rates, higher dividends, strong earnings. Those are just little things that we have in common, right, Stu?

We should do an outside one from the North Pole. We could go outside, collecting dividends.

We'll have to check in with producer Nancy on that, because at some point we got to go do a live tour and get out in front of people.

If the SmartLess guys and other ones can do the live shows, I think it's in our future.

There we go. At least we'd have our families there. I don't know if anybody else would come out, but that would be nice, too. Just a family get together. Like Thanksgiving. Thanksgiving is coming up. If we have any American listeners, it is Canadian Thanksgiving next Monday, which is always a great weekend because it's the core of the fall. I guess, Thanksgiving in the US would be the same, but that's really it when it comes to the fall.

Yeah. Pumpkin pie. It's hard to beat.

Oh, you like the pumpkin pie, eh? You do the pumpkin spice lattes as well, Stu?

No, not pumpkin spice, but I actually like to make my own pie. I make a Graham cracker crust with apples sauce. You mat it down, and then you put the pumpkin in there, and it’s pretty good.

It's amazing. We've been doing this for almost four years now, and I'm still learning stuff about you. I had no idea you had those skills. So big Canadian or North American equity fund, billions of dollars under your purview. And then you're making pies. That's awesome.

A pumpkin pie is not hard to make. It's right above boiling water. We could all get through it.

Once again, always so humble about your crumble. Well, as we have this happy tone around today's podcast, it is in line with a lot of stuff happening out there. So we have the Fed cut rates, 50 basis points last month. And we're going through a series of data points that were a little bit underwhelming, some flat out disappointing, which is ultimately what led to a significant rate cut and inflationary pressures coming off. But then boom, and not directly related, but ever since, we've seen a lot of things happening. We saw the jobs report last week, which we've got a good podcast with Eric Lascelles posted. It's the last episode before this one. If you want to go back and hear what Eric has to say, some very interesting stuff there, but an unusually or unexpectedly good jobs report out of the US, and they push the numbers higher for the previous two months. So more employment than we expected. We've talked as well with Eric and others on the podcast about the Chinese stimulus, and this new package that's coming out, which may actually be something significant this time. We talked last time about some of the new policies in Canada around housing. So there's some things going on here in the fall. Is this the animal spirits letting loose, or are we letting loose maybe some risk that inflation doesn't come down and rates don't come down as much? So that hurts stocks. How do you put all this together?

Well, on your dashboard of indicators, there's lots of them, but one that I like to look at pretty frequently is called the Citi Surprise Index. And what that measures is, you have some view of expectations in the economy and whether or not the data is being reported worse than expectations or above expectations. And we went through a string there where the economic data was often worse than the consensus at the time. And sometimes the consensus is for booming economic activity, sometimes it's for rather pedestrian economic activity. I would say right now we were in the pedestrian economic activity, yet each time there was a result, it was a little bit lower. So you look at this graph and the most indicators are lower than consensus. The bar is the widest that it can be. And as we were coming through at the end of September, that bar started to shrink a little bit. And with the non-farm payroll last week, it actually went positive. It was the first time in probably a couple of months that economic data was better than where consensus sat. And the reason that we like to look at this chart is it gives you a sense of markets in the short term, where money sloshes from one side of the boat to the other side. How many interest rate cuts were factored into the market? This consensus had become pretty tight, and so it was vulnerable to slightly better economic news. And that's what we've seen in markets. And we've talked about fixed income after a big run. Maybe we would be collecting our coupon rather than getting total return. We've seen a small backup in interest rates following this, but we’re still in that range of collecting our coupon. And it's not so much that a stronger job data means inflation is about to rebirth. It just means that the possibility of things being better was not priced high enough into the market. So we've had a little bit of a resettling. And you mentioned there was a bunch of things at the same time, like the China stimulus, whether or not that will be successful or not, time will tell, but commodities rallied. So the things that make inflation, all of a sudden, they stop going down. So, again, you do that, you do the farm payroll, and people say, well, we have to just recalibrate around some of these data.

So the commodity prices moved quite a bit, and we'd also seen oil get down into the mid $60 a barrel. I think we've talked in the past, or I've talked with other people on the podcast who posited that we're in a $65 to $85 range for oil, and that's likely where we stay. Although geopolitical issues get roiled up and all of a sudden you see oil pop. And you've got copper, which is that commodity we've talked about in the past. It's everywhere. So it's a good barometer of where economic activity is. It pops 50 cents, I think, off of the Chinese stimulus. And then the Chinese stock market itself. I mean, wow, you were sharing the result in just the Chinese stock market around this, this stimulus announcement.

Yeah, it was a really stunning price action. A little bit of market structure today, but to basically make a 52-week low and then a 52-week high within eight or nine trading days of each other is really quite something. Either there were people who were really short in the market or didn't own it, and when this stimulus came along, they decided we need to change our minds. And it was just a really violent rally. Now we've pulled back a little bit this week, and I think this is now where you'll start measuring the temperature. You never really want to do anything when markets are making violent moves. But as they retrace some big movement, then you can have a rational look and say, do I want to participate or not?

So Stu, from your perspective, looking at it — and I've talked to some people who actually work in the emerging markets, and they're somewhat optimistic about this Chinese stimulus package, that this one might actually break through. Is that your view or is the market telling us that this is different this time, or is it really still way too early to tell? Because so many things have to happen to really fix what has ailed the Chinese economy over the last couple of years.

Yeah, my opinion from an economic standpoint would be not amongst the best. I look at the long-term share price of China. It hasn't really been a bull stock market. If you look at a long-term chart, it's not lower left to top right the way that you would like to see as a long term investor. It's a bit more range bound. It was at the bottom end of a range. So again, the ingredients for this type of action were there. Then the other thing, on an intermediate term standpoint, you could probably make the case, purely technically, that the base was quite long. And there is a technician's line about big bases: when you break out of a big base, that's going to draw a lot of eyeballs from a technical standpoint. And I think the long base and the price action, coupled with what they announced, helped shape the narrative in the short term. And I wouldn't be surprised if that likely continues a little bit.

And so then as all of these factors come into play in the market. We have to see if we get another jobs report with some follow through, because that's one of the things we're always looking for after you get that first Fed rate cut, and when it comes after some disappointing results in the employment market, you want to see some signs that employment is picking up because that's your signal that you're going to have a soft landing, not a recession. So we'll have to see if there's follow through in the next couple of jobs reports, one just before the election, and then one after the election, which may also create some noise in the numbers. But if we keep going back to those three buckets of stocks that you talked about quite a bit a couple of months ago, does the potential for maybe rates not to fall as far, and particularly at the long end, to get anchored here, does that impact where you're looking in those three buckets or your expectations particularly around the stocks that are interest-rate sensitive?

Yeah, for sure. And those stocks had done quite well. The three buckets, as a reminder, were these high growth, high valuation stocks. Then, what I would call quality, modestly cyclical, very good businesses. From a long-term standpoint, that's my stomping ground. I think that's the great ticket to ride in the equity market. And then the last bucket is very interest sensitive because the cash flows are very durable. And those stocks really saw a very strong set of performance on the back of the interest rate move. And that really is like a valuation expansion. They're not magically growing more. They grow by 4 to 6% a year through thick and thin. And when the valuation goes up a lot, you're pulling something a little bit forward. That second bucket, I think, is a very good soft-landing bucket. And you made the point on unemployment staying low. Normally it's two or three months after the first Fed cut, if unemployment is still in good shape, that's a very important indicator. I think that first bucket has been wobbly a little bit. It's had less membership than it had three months ago. There's still a couple of very significant members. So it's not like it's really cracked or anything. And maybe it'll get a bit of a reprise if people say, well, rates aren't going to fall as fast, so I'm going to go back to that maybe more visible growth for a period of time. But that second bucket, I like.

Stu, something I haven't checked in with you for a while. You're always talking to these companies and the senior leadership at these companies. What have you seen through this year? The way that they're looking at their businesses and what's happening in the economy and interest rates — and you got to keep in mind we're only a few weeks away from this election in the US — were they more negative at the start of the year, more worried about a recession, and now you're seeing more positive, or are they still quite uncertain around the way this is going to play out? What are they saying to you?

Definitely an improvement in sentiment from them versus the beginning of the year. More uncertainty at the beginning. Now it's better. There was a survey out, I think it was from Bank of America, today 80% of US businesses expect their revenue to grow next year. And you can also tell, 12 months ago, you talked with management, they were very focused on efficiency. We're going to take costs out. It's not like efficiency has dropped way down the list. They still think it's going to be a tougher environment, but they're like, well, maybe the revenue environment could be a little bit better, so that's starting to come into play as well.

So revenue up again. They really do feel that we're going to engineer this soft landing. What do you think earnings look like a year from now?

I think they'll look better. The expectations are pretty high. But let's say inflation was 2%. And let's say growth was 3%. So nominal growth is around 5%. Maybe it won't be that high. Maybe it'll be 4%. But say I'm a business. I've been very focused on efficiency. So say my costs just grow by 2%, my revenue grow by 4%, my profits are going to grow by more with the operating leverage. That's not far off the long-term average of earnings growth. So right now, maybe our expectations are robust. I think they are. But the ingredients are falling into place, I would say.

And then just one other thought, because your area of expertise or specialty is in North America. You've got the big brother, US, the little brother, Canada, and the US has just had stunning relative performance going on 13 years now relative to Canada. Is this an environment that you think tilts that in any way? I know that you're just looking for the best companies anywhere, and a lot of these are companies that are operating all around the world that you're dealing with. But anything in terms of what shifting here, coming out of a soft landing, with good solid growth that's not inflationary? Does that give Canada a chance to keep up with the US? Or is that a particular part of the US market that we just don't have? I talked to Scott Lysakowski about that. Why don't we have a Magnificent Seven? Does that just keep the US market chugging ahead and drawing the attention and capital of the world?

I think it might. But Canada could be a pretty reasonable performer in that environment. In order for Canada to really outperform, we remember the early 2000s, the first ingredient to that, before we even talk about the Canadian stock market, was that the Nasdaq went down, and the S&P went down and the TSX didn't. And as a result, it was a great time to be a Canadian investor. And then when interest rates started to get cut in 2001 and the economy found its foot, Canadian stocks did well. The average US stock did well. And then Canada had the kiss of the commodity boom as well. When I look at the Canadian market today, there's always that option in energy. We've seen a lot of volatility. I think the problem with the energy market right now is it's a supply-controlled market. So it's hard to rip to the upside because there is extra supply in the long term. In the short term, there's geopolitical events that come into play. So there's always that option in Canada. All that said, too, our Canadian businesses, our Canadian energy companies at these crude prices are producing a lot of free cash flow. But the average stock in Canada, that looks better, but so does the average stock in the United States. So I think for Canada to really outperform the United States, you're talking about that first bucket, the high growth, high expectation bucket sputtering. And we'll see. There's no question that expectations are very high.

But it continues to be. I’ve been doing a lot of speeches lately. This is the time of year where I'm generally out in the road and in front of investors. And I think we always need to look back. It's not an indication of exactly what's going to happen, but you want to look back at where we would have been sitting and having a conversation a year ago, and we would have expected that inflation over the next 12 months was going to get under control. That that would lead to interest rates coming down. So that was going to be good for bonds. It was going to be good for that one bucket, the interest rate sensitive stocks, and these quality companies. But you add it all up in a 60-40 portfolio — which is a balanced portfolio, not an unusual portfolio for a Canadian investor to have in place — it’s up in excess of 20% over the last 12 months. That's about three years of returns in one year. It's really been a fantastic year. You just have to wonder what's the scenario that could give you another year of above-average returns. And it's certainly there. I think you'd like to have to mute expectations a little bit, but I'd still think I'd rather be in stocks and bonds than sitting in cash, given the environment that we're in, no?

There are the tactical aspects of cash, but generally speaking, the rate on cash is likely coming down. The rate on bonds, collecting the coupon, collecting a reasonable equity market return, that still looks enticing. But to your point, it does not look as good as it did because a chunk of both markets has been valuation change. When valuations are depressed, you would make the case that they will normalize. When they're elevated, they might stay elevated for some good reason, who knows why, that we've discussed. But banking on them to stay elevated is a bit more challenging. So you would just have to be prepared for that.

We're not here to call markets one way or another. That is beyond the scope of this podcast. We're talking in generalities around markets and ideas and how we position portfolios that are being managed by Stu and others. So we're not suggesting you buy this or buy that or sell this or sell that. But I hope coming out of the conversation now, looking 12 months back, the conversation we were having a year ago, for the listeners, we kept them invested so that they got the benefit of this past year. I can listen to a podcast on health issues. I'm not going to diagnose myself. I'm going to go and see my doctor who is my trusted advisor to make sure that I'm doing the right things if something's bothering me to get better. And same thing applies when you're talking about your portfolio, make sure you're getting good advice, and it really should fit. And this is what I'm here doing. I'm in Montreal today, Stu. I'm going to talk to a group of phenomenal financial planners here in Quebec. And I always love getting with this group because they're just fantastic at what they do. And so being able to get access to someone to help make those critical decisions. I mean, ultimately, you make your own decisions. But to help you and to put your investment decisions in the context of a long-term financial plan. Well, I know it's what you do, Stu. I know it's what I do.

Well, it's like this weekend. I'm going to unveil the pumpkin pie, and there'll be a point one day when I say to my wife, why isn't this the only thing I eat? Because I like it so much. And I need an advisor for those types of discussions as well.

Well, that's good. So, Stu, I need an advisor when I'm in Montreal because you know that I'm going to check out the buns filled with hot dogs. That's where I'm headed right now. And I would only eat hot dogs if I lived in Montreal. Unfortunately, I don't. Well, actually, no. But it's not the right way to do it. Diversification. So I'll bring some hot dogs down. You get the pie ready. We'll have hot dogs and pumpkin pie. And celebrate a great year of returns. And we're going to be watching that job market to confirm the soft landing. Enjoy that chill in the air, Stu.

Great. Thanks, Dave.