Hello, and welcome to the Download. I'm your host Dave Richardson, and it is a late breaking special edition of Stu’s Days. Stu, we couldn't catch up with you Tuesday, Wednesday or Thursday. We're taping this on a Friday. I think this is our worst delay yet. But there's a good reason: you were in the Big Apple.

That's right.

Not the one in Colborne either. Like, the real Big Apple.

That's right. Got called up to the big leagues for a couple of days.

Obviously, when you go to New York, they roll out the red carpet. You're involved in these high-level meetings with everybody. Anything you took away from your couple of days down there in the center of the universe?

Well, yeah, it was interesting. New York is a lot busier than Toronto is, downtown. And I think that's the case in a lot of global centers while we're still coming back to the office some days, not all days. Manhattan was as close to pre-COVID as I've seen a city. In my mind anyways. So that was probably the biggest thing I noted. It's always great, the pace of activities. People are moving. So it’s hard not to like it.

Some people say it's the city that never sleeps. I don't know if you've ever heard that.

Apparently if you can make it there, you can make it anywhere.

That, I hadn't heard. That's a new one for me. Did you get some rest, or you were just working the whole time? You never stopped, did you?

That's right. Never stopped. 24. 365. 7 days, Dave.

There we go. I haven't seen you out of your office in weeks, so I know you're bunkered down there except when you're making these big trips. So let's get into what's interesting right now at market levels. But we were having a chat about just the bottoming process and you sent me a couple of things that refer back to the big tech bubble burst in 2000 to 2002. And a lot of people made comparisons. We've even talked about it on this podcast with you and Marcello about the similarities and differences between the tech bubble burst back then and what we were seeing in tech, or at least the leadership in tech and some elements of the tech market coming into 2022. But you had some thoughts on some of these stocks that have rallied early this year and sort of a way you might interpret what's going on there.

Yeah, normally what happens in a market decline is you get a fairly significant shift in leadership. And by leadership, I mean the stocks that are driving the market. So when the market goes up, they're going up more than the market goes, and when the market corrects or goes down, they're going down less. That's leadership. So all through COVID, leadership was in the hands of the big «Fang» stocks, the stay-at-home stocks. And it was a very narrow leadership, which people don't like as much when it comes to the market. Starting in the middle of last year, even while the market was correcting, the headline market— and the one line that we used was: sometimes it's a stock market and sometimes it's a market of stocks— so the market was broadening underneath some of the headline declines. More stocks were participating. An old broker used to say to me: in a strong wind, even a turkey will fly. So the market was broadening, more companies were participating, even though the headline indices were struggling as there was some correction in the bigger market capitalization names. And that's a very important thing for a portfolio manager to take note of. The leadership change that takes place in the decline normally sticks for the next up-cycle. So that's point number one. Point number two is that to frame the bottom, normally the old leadership has to recover, and it recovers for a period of time and then, sadly, it often goes dormant for a period of time as well. Coming out of the tech bubble, the companies that were the survivors— Cisco, Apple, Microsoft— almost doubled in 2002 off their lows and then it took them a number of years before their share prices reaccelerated as the earnings that the bubble had correctly predicted finally arrived. And then they became good companies again, or good stocks again. So what we've seen so far this year is a significant rally in some names that had been amongst the worst decliners last year. And some of those rallies will persist, some of them will flare out, but I would say it's also a better sign for the market as a whole because we know that those two ingredients often happen during a decline. First is a change of leadership and then the bottom gets sealed by a recovery in the stocks that had been the worst.

Yeah, because they're all part of those indices, they float up, as you say, and that puts that base in terms of the actual index level, but then they just flatten out and other leadership ultimately takes the index higher in that next wave up.

That's right. We look so far this year; material stocks, Caterpillar, things that you wouldn't normally associate with a recession, have been very strong. So you get a recovery in some names, but you get ongoing strength in this area of new leadership. And we saw that in the equal weighted market relative to the S&P 500. The equal weighted market did bottom earlier in 2022 and has been quite a bit stronger. We've seen it in dividend stocks, we've seen it in a variety of companies that have just powered through some of the volatility.

Any thoughts on what you think the next leadership is going to be for the next cycle?

I think the average stock is going to do better than the headline. People use this value and growth bucket. I'm not a big fan of that, as you know. But what I do think is that the economic growth is going to be broader than what it's been in the past, so more companies will participate in it. The themes around reshoring, the themes around the amount of investment required for the transitions in the economy for renewables, these are going to be, I think, longer lasting. They get associated with a handful of companies, but they're broader benefits to the entire economy. So I think there's going to be more participation of companies across all sorts of sectors. Financials for a long period of time have been pressured because of the low interest rate environment, not so much in Canada, but globally a little bit more. And while I think interest rates are in the process of peaking, I doubt we're going back to the levels that they were in the middle of COVID or before. So a more flattish type interest rate environment could be more supportive to financials. I just think there's going to be more companies working than maybe there has been in the past.

Really interesting. Let's look at the big index, the one that's followed by more people than anyone, and that's the S&P 500. And it’s just been sitting over the last couple of weeks, kicking right and around 4000. It seems to be trying to decide whether it wants to rally up or we're going to go into a little bit more of a down phase and maybe go back and test some of the lows we've seen. I know you do a little— actually, not a little bit— but you do use technical analysis as a tool to make decisions. What do you think a lot about these technical levels that we're seeing on the S&P 500? What are your thoughts on that and what are you seeing on the charts that you're looking at that are relevant to the way you're making decisions?

As you know, I like quotes from old investors and strategists and Byron Wien, who was a great one from Morgan Stanley, he had a line around technical analysis which was: when I go hunting, I take my dog, but I don't give him the gun. And technical analysis to me is really about studying where the debates are going on in the marketplace. Something that's range bound is a debate between the top of the range (how could it get better?) and the bottom of the range (how could it get worse?). As a scenario-based investor, you try and envision how it could get better and how it could get worse. And technical analysis is a great tool to identify where there might be small changes in the margin. So if 50% of us think it's going to get worse, and 50% of us think it's going to get better, you're going to have a stock in a range. If it starts to break out of the range; you have the 50% who already think they're kind of in place, but then other 50% start changing their mind one by one, that's what breaks the stock out of a range. Because on the long term, as fundamental investors, it's about earnings growth using a normal valuation and collecting your dividends that drives your long-term returns. But in the short term, it's really about how money flows around in the market. So if I had a box and it was filled with water and I move my right hand up a little bit, the water is going to flow back and forth on both sides of the box. And that's what happens in the stock market every day. So these levels help us identify where someone might be tilting that box a little bit more than imagined and people's views are starting to change. So we sit here today and we've talked about the bull case scenario, the recession case scenario, maybe coming into the year, we're seeing a little bit of strength because people were more anchored around the recession scenario. What’s also interesting about the stock market is that it's not that there may not be a recession, it's if the odds of that change by a handful of percent; then the stock market has to recalculate the odds around that and you get some price rise, which I think is all indicative of this kind of 18-month period we envision. So, 18 months from now, whatever we're going through in the economy will have passed, earnings will likely be better. We can apply a multiple to that. The path about here and there is difficult to predict and we're open to it going a number of different ways. But keeping the end result in mind allows you to identify, well, if it gets a little bit better, the stock market might get a lot more better in the short term and then it might digest that and pull back. But these levels help us think through what is the market or the market participant are also thinking about relative to what we're thinking about.

Okay, so a lot of people are talking about this 4060 to 4100 on the S&P, or even really between 4000 and 4100. That's where that battle, that range, that fight is going on right now. Any thoughts on what you're seeing there?

Yeah, so no question, if you take out your chart and you get your crayons out and you draw a line from the very high in the market to all the successive highs, we're right at that downtrending line. It also happens to be right around the 200-day moving average. So the last time we've gotten near that line, it's done it with no underlying momentum. Not to get overly technical— talking about technical analysis, of course—, but let's say we have a 50-day moving average and a 200-day moving average. So if I hit the 200-day moving average and the 50-day moving average is still above me, I got there, but I don't have any support, I got no friends. So that often then peels away. Because you're getting back to a level that people own stocks at, which allows them to sell it. And I don't have enough people with me on the other side. So we've probably touched that trend line three or four times since the market made its high. This time we're touching that trend line, but the 50-day moving average is underneath us. So just a very small, but maybe significant difference is that when you start to hit these types of levels, are you doing it with more support than there might have been in the past? And I think you could probably make the argument that you are today. So that's how we think about it, technically. It is admittedly more art than science. You do have to keep these scenarios in your head, but when you put it all together, it's like longer-term interest rates have improved. Bank of Canada was the first one to say, maybe we're done. We'll see what the other central banks do in the coming months. That doesn't mean that they're going to immediately cut interest rates. But again, a lot of things that happen in the stock market are rate of change. So if the central banker says we're likely done— maybe 25 more—, still the rate of change is going in your way in terms of interest rates, like the worst of the interest rate increase or percentage change is behind us. So you get all these things, you get worried about the economy. Could we be more worried? It's possible, but we've had a lot of discussion around worry. So those are the things that you're trying to weigh in the short term. I'm going to borrow from Warren Buffett another quote: in the long term it's a weighing machine. In the short term it's a voting machine. The votes are cast around these things in the short term.

Yeah. And like we say, we talk about technical analysis. I love the Byron Wien line there. And what he's basically saying is it's just one of those tools in the toolbox. It's not the ultimate decision maker. There are so many other factors and there's all kinds of other things that you're using to build your scenarios and test your scenarios, but it's just that one tool. And it's just an interesting period when you're looking at markets right now, as you say, it's just bouncing in around that particular level where you typically go one way or the other. And as you said, just like as you were wandering around New York, Stu, you have more friends with you this time than you have when you're wandering around here in Toronto or when you're alone in the office like you are right now?

That's right, Dave.

So again, as always, excellent stuff, Stu. Thanks again. And we'll be back quickly again because I think we actually are going to catch Tuesday next week and do the actual Stu’s days that everyone loves and cherishes all across Canada.

All right, well, thanks very much, Dave.