Hello and welcome to The Download. I'm your host, Dave Richardson, and it is Stu's Days with a very well-dressed Stu Kedwell, because we're making a videotape today, Stu. So you got the message?

I did. I put the tie on, Dave, just so I could actually one up you.

I know what you're up to.

And I have my summer suit on. It's a tan suit, and you can only wear it until Labor Day. So you have to get these things in when you can.

So you still follow that kind of stuff?

I'm very superstitious when it comes to that. And I think that's a superstition, although maybe it's some type of universal rule, I'm not sure, but I’ll definitely put it back in the closet come the weekend.

There are all kinds of negatives on climate change, but isn't that one of the positives that you can wear your summer suits pretty much to Thanksgiving now? Because we get pretty good weather through the fall?

Yeah, I guess so. Maybe it's my Mom's doing, May 2-4 to Labor Day. I'm going to abide by it.

I think we've even had 30 degrees days in March in Toronto.

I could pull it out. I could go with the white pants. But I'm a stickler for those old-fashioned rules.

Well, Stu just gave a big tip for what's going to come on future videos here, for all of you who have just started watching us on YouTube. I know thousands of you listen to the podcast, but we've only had a couple of hundred people on the video. Those of you who are watching the video, tell your friends and those listening, get on to YouTube and start watching the video version because the next Stu's day that we videotape, it's Stu in white pants. He just said he's going to do it. And as you can see, he's been working out.

I think white pants are slimming, so maybe I'll give it a shot.

Make sure your glutes are firing on that episode, Stu. There we go. So, Stu, we're going to do an investment Stu, today. We're going to bounce around. Lots of stuff going on. You suggested maybe a specific soup or something you want to stew up in the pot?

A Stuillabaisse.

A Stuillabaisse. Oh, very nice. We're getting fancier. Actually, this will be pretty fancy stuff we're doing today.

Yeah, well, we are on video, so we have to take it up a notch.

Oh, Emeril Lagasse. He would make a good bouillabaisse or Stuillabaisse. So we will kick it up a notch here. And let's start with Jackson Hole, which would be kicking it up a notch in terms of just where we are because it's beautiful there. I haven't been, but people tell me it's beautiful there and also that I can't afford to go. So I assume it's a pretty nice place. Have you been there, Stu?

I have not been there, but it did look pretty sweet on the video.

I was reading an article that it's actually where the really rich people go who are tired of going to Aspen. So it's developing that much. But the people that did go for that meeting in Jackson Hole were Jerome Powell and his gang of Federal Reserve presidents. They do this annually, Stu?

They do it annually, yes. And they get talking about where they think monetary policy is headed. I thought this one was interesting because we've had periods of concern. Is the economy slowing? Will the Fed lower interest rates? And they were fairly definitive that they now see rising unemployment as a real risk. I think they use words like «something we don't welcome». And I think it's pretty important from a market standpoint, not just whether or not the Fed intends to lower interest rates, but whether or not it's in front of or in advance of or behind. If you get in a situation where the economy is slowing and maybe earnings are slowing a little bit, and the Fed has ammunition to counter that by lowering interest rates, and you believe that they will, in fact, consider that risk, it changes investors' mindsets a little bit. It allows them to then look a little bit farther out. What will happen if the Fed is successful in lowering interest rates and restimulating the economy? What would the economic and earnings picture look like in that environment? And markets received the Fed's message pretty resoundly. They were pretty enthusiastic about it, which always requires a little bit of thinking. But I think what's been interesting in the last month is that we talk a lot about the S&P 500, we talk a lot about the average stock. And the average stock made a new high. The market hasn't quite made a new high, but the average stock has done pretty well. And the character of some of the things in the market has changed. The number of stocks that are participating in this has been better. Some of the sectors that are participating have been different. Importantly, financial stocks, which we've talked about a couple of times, have been pretty strong throughout. And that is the market's way of maybe saying that we're a bit more comfortable with a soft landing. If you could get shorter interest rates coming down, get some slope in the yield curve so banks make more money on that interest margin — eventually they will. And so I thought that was probably the most interesting part. Just this notion that inflation has come down. As we talked last time, it reemerging would certainly be a risk, and we've thought a lot about that. But the idea that the Fed is a little bit more balanced in terms of what they're going to be looking at.

Yeah, very interesting. We had Andrzej Skiba on last week talking about interest rates in the US, and we were in the middle of Jackson Hole, so we didn't know exactly what Chairman Powell was going to say on Friday and what exactly would be said coming out of those meetings. We did a little speculating on it. One of the key ideas is that when we get to September — and this is really what Powell essentially confirmed; we got to be careful, it's never done until it's done — but that the Fed will start to cut rates in the middle of September. September 18th is the date they'll make that next announcement. At that point, you can go back historically and you can look at the way markets perform over the next 12 months. Then you can look at the conditions that you have in the market at the time that that first rate cut takes place. For stocks, that's critical because if the cutting of rates is indicative of a really bad economy, then that's going to be bad for stocks over the next 12 months. But if the conditions for the economy are just a slowing economy — where the rate rises were generally designed to slow inflation and calm the market and the economy down a little bit so that we could get into the next cycle without any dramatic economic damage — the stocks actually do pretty well over the next 12 months. In general, because those two scenarios play out well for bonds either way, the bond market ends up being pretty good once you get that indicator. So that line in the sand where we move from rising to from waiting to actually cutting, that line is an important one. And if we interpret it the way I think you did and I did and the way the markets interpreted it, Powell drew that line. We're about to go lower. And so now market participants can start to do that recalibration to determine what should happen next, right?

That's bang on. The thing I would add to that is in the next three months following that line being drawn, the path of unemployment is very important. If unemployment peaks within that three-month period, and then employment starts to grow again, unemployment starts to come back down, that pretty much seals the soft landing. You have two 12-months scenarios, but you've got some road signs that we'll be paying careful attention to over those next two or three months.

Yeah, that three-month period is where we're really going to start to see what kind of an economy we're about to have as a result of all the tightening or the higher rates that we're starting to move away from. You're right — and the markets are showing that, I guess, with the volatility we've seen over the last two or three weeks — is that you're still not at this point exactly sure just how bad the economy might get through all of this.

Yeah, I would say the one cushioning factor is just that first point: do investors’ time horizons lengthen a little bit if the Fed is cutting interest rates? We've grouped the market into these three baskets of stocks that we've discussed. And the middle basket is likely the most important at this juncture, quality companies with modest economic sensitivity. So if you're sitting there owning those companies and you have an idea about how their earnings could re-accelerate, before maybe you're debating: will they or won't they? If the Fed is lowering interest rates, you're debating: when will they? It changes your mindset a little bit and makes some of those quality companies that are paying very good dividends a bit more interesting at this juncture. Just because you're going: I'm getting paid to wait with the current dividend. I have this sense that as the Fed lowers interest rates, it'll improve the economy and create the conditions for earnings growth and then future dividend growth.

And when we start to talk about dividends and scenarios around interest rates and yield curve slopes and future earnings, it almost always takes us back in Canada to the Canadian banks who are in the midst of reporting. Anything interesting going on in those numbers that you've seen thus far?

We've had three banks report. Probably the most interesting thing is that, whether or not it's taking place within a quarter, for the concern over the Canadian consumer and the provisions of credit on the personal side of the business, we're in the final innings, it appears. And some banks have seen their provisions dip ever so slightly, maybe a little bit higher than last quarter, just on the personal side. So I think as interest rates have come down, the sentiment around the Canadian consumer is not one of overjoy, like high fives and handshakes all around, but maybe through the worst of the pinch point. And investors do tend to be ready-to-change people. A negative that's getting less negative ends up being a positive. And I think we've seen that so far out of three banks. There are still some one-off files on the commercial side of the equation — actually more so in the United States than anything — that are still coming through. But we spend so much time talking about Canadian mortgages and higher interest rates. Yes, they're still going to be higher, but they're not going to be as high as they were in the early part of the year. So there's a couple of modest positives, I would say, for the Canadian consumer so far in the banks. The rest has been pretty much as expected. Loan growth has been pretty slow. Not a surprise. Capital markets have been not bad. And wealth has been better just because markets have been so strong.

One of the charts I put up when I'm out with real estate professionals is a chart that shows all the maturing mortgages that are coming over the next two and a half years and the typical rate that they're maturing at. And so you look at today's rates and you go, wow, if somebody has a mortgage that matures a year and a half from now and the rate is still where it is today, that's going to be quite a bit of money out of their pocket. But as you start to project out now — and the market has not been perfect on this; it never is — but some of the projections on where we get to with rates over the next 12 to 18 months actually gets those rates down. Not down to where they were, because we may not see that again for a long, long time, rates as low as they were in the middle of COVID, when we were shutting down the global economy. We're hopefully not going to do that again in our lifetime. But getting back down to where the pinch won't be too, too bad. And then, of course, along with inflation, we've had some wage growth in the interim as well. So hopefully the damage that that does the consumer is very much moderated or virtually eliminated by that movement in rates.

And I think the other thing I'd add to that is there's been a sequencing to that. Food costs more. It’s not going down in price, unfortunately, but it's not going up at the same pace. So budgets have been able to recalibrate. And the one last thing in the budget that needs to be dealt with is slightly higher interest payments when you renew your mortgage. But it's not like it's all happening at the same time. And a lot of wage improvement is still in the pipeline because when wage deals have been signed, it might be for a 5 or 6% increase over each of the next three years. So there's also some things that come through on the positive side that assist with the overall budgeting process.

Yeah, and not everyone has two daughters heading to university this year like I do. So they're doing hopefully a lot better with their budgeting than me or my three-hour drives to Kingston with a rented van, which has become my everyday activity.

I'm in the same camp. Mine's off on Saturday for her first year. I've learned that it's not possible to have enough throw pillows. That's what I've learned. And so we're keeping the throw pillow business in good stead.

Well, when we get to something that may or may not be possible, let's just finish off today with this. We're here on Tuesday, August 27th. Wednesday, August 28th, is a pretty significant day in the market because one stock, NVIDIA, has started to garner probably more attention than any other stock in the market and might be viewed as the quintessential AI stock. And that's one of the things that's been driving markets and is driving optimism of our market, not just today, but into the future as well. They report their earnings after hours on Wednesday. And the expectations, as always, are high. Have they sold enough throw pillows over the last quarter to meet those expectations, Stu? I know you're helping out and lots of companies are helping out buying their throw pillows, which are, I guess, actually AI chips and servers and stuff. But can they do it? And why could this be such an important earnings announcement? We never like to focus on just one company, and we very rarely do. But this is one that just seems to be where it's happening, when it's happening, and this could be somewhat important.

Yeah. It's important in the short term. It's always funny when you go look at the long-term track record of the market or of a money manager. There's lots of events that feel like the Super Bowl contained in that long-term track record. No one is ever as important to getting to your financial goals as you might think. But in this instance, a lot of other of the highly valued stocks have fallen a little bit by the wayside. It is the one that still sits at a level that has shown fairly strong price appreciations. So there would be very significant expectations that these expectations will be beat. We would have to do a podcast on whisper numbers, but you could whisper something and it likely has to be better than that, that the guidance going forward needs to rise to keep the momentum going. And the reason for that is not so much that NVIDIA's price earnings multiple is definitely elevated relative to many others, but what's very important there is the revenue growth and a very tight demand for their products, which allows them to earn the margins that generate those earnings. As an analyst, you're looking at it on a number of ways. Will it be better or worse than expectations? Lots of surveys have been done on the sales. And as I say, when you're in a situation when people expect it to beat expectations, you know that their business is strong. Will it be strong enough for the market's current appetite? Time will tell. But in the context of being a long-term investing, looking to compound your capital over many years, it's just an event. It's not something that is the driving force in a long-term financial plan.

Sure. When you have a highly popular podcast like we have, we have to continue to say that there's exciting stuff coming up that we're going to talk about so that people will listen again to Stu’s Day's next week. So there is a little bit of that in there. But you did mention something that I found really interesting just when we were talking before we started. When you look at different market events and the way the market thinks or the way different market participants think or will react in terms of volatility and how much it will affect the movement, this actually does line up as a fairly significant event when we talk about jobs reports and inflation reports, which have been so important over the last year.

Yeah, I read on the weekend — and I wish I could 100% explain it — but someone who has divided up what are likely to be the most volatile days in the next month. And the NVIDIA earnings day tops the charts above employment, above CPI. And that's interesting because there's so much wealth tied up in NVIDIA right now at its current market cap. Whether or not it barnstorms forward, I don't think that's important. But you wouldn't want to see a substantial correction in its valuation because that would likely mean two things. One, it would go down, but then it would also likely mean that the vision of the future was not quite as robust as people felt. When a tree is growing to the sky, you value it like it might go to the sky. Once it doesn't grow to the sky, you're unlikely to assume that it will, if you know what I mean. And that's the trouble with these high expectation stocks, and that's what I mean in the context of a portfolio. They're never the driving factor in long-term returns inside of an index or what have you, but in the short term, you can get a lot of discussion around these events.

I think the analogy we were using when we talked about this maybe 9 or 12 months ago, is the idea of expectations with, say, my wife. When are you going to be home? I'm going to be home at 7:30, and then I arrive at 7:00. So I've beaten expectations. Good. And then the next time I say I’ll arrive at 7:30, I arrive at 6:45. Better. And I consistently arrive at 6:45 and 6:30. And then all of a sudden, the expectations are that I'm going to be home at 7:30, but she starts to think, actually, it's really 6:30. So if I don't get home by 6:30, I've actually disappointed her, even though I said I was going to be home at 7:30. That's the way expectations can get out of whack. And then on top of that, when we talk about a company like this and other companies where they sometimes get through the earnings cycle, these high growth companies with big expectations, is I say 7:30, I arrive at 6:30, and that's not good enough because she was hoping I'd arrive at 6:15, and then I have to tell her next time I'm going to arrive at 5:30. I just keep ratcheting the expectations higher and higher and higher to the point where you just can't get there, which is your tree growing to the sky. Just a different way of saying it.

Yeah, because you run that forward and you have to arrive home before you've even left for work. That's the law of large numbers.

See, I knew you'd get to the law of large numbers. You're right. You're too darn smart for us, Stu. But approachably smart, and that's what we like, like a Stuillabaisse.

Well, it's often the summertime special. Vichyssoise didn't really match up with my name.

Well, what did meet expectations was that tie. So let's hope that this isn't the last time our loyal viewers get to see you in that tie. Although we will also be watching for your color choices because we want to see you solidly in the fall after Labor Day. So we'll talk to you next week.

Okay. Enjoy the rest of the summer, Dave.