Hello and welcome to The Download. I'm your host, Dave Richardson, and it is an extremely painful Stu's days. Stu, let me tell you, I went to the physiotherapist for my knee today. I got a bum left knee, a torn meniscus. I know you've got a lot of health issues yourself.

Just the word meniscus sounds painful.

It does. Maybe we'll find out later on talking with you that the market has a torn meniscus as well. So I go and she tells me what she's going to do, and I really didn't understand it because it's my left knee that's got the problem, and she started with my neck and shoulder. I'm all misaligned. My hips are uneven. I got a little scoliosis, and my patella is elevated. So she starts basically beating me up. I don't really know what's going on, but she just seems so incredibly competent. I just trust it all the way through. And then, sure enough, she puts some machine on that tightened everything up at the end, and I walked out feeling great.

Sounds like a good advisor.

Yeah, well, that's exactly what I was thinking, it sounds like a good advisor. So you get the right advisor, and you go in and maybe you don't listen to this Stu’s day's podcast every week, which you should be doing. And so you go in confused. You're not exactly sure. You don't know how it's going to work out in terms of putting together a plan. But if you just trust it. I even relaxed for a minute, too, which is hard for me. And it all works out.

Yeah. Well, there you go.

If you're with the right person. I could have been in a bad spot. I was also thinking it's like the markets, too, right? So you just trust the markets long term and you're generally going to be okay. But that doesn't necessarily mean short term there can't be some pain along the way. And that's what we've been experiencing so far this year.

Yeah, that's a great segue to what's going on. And we're back to flat on the year, and we had a very large decline. I think versus other large declines, the issue with this one was it was self-inflicted. It was the result of certain actions, which in the back of your head, you always wondered if they could undo these actions. So it had a different feeling than one that was caused by a financial crisis or caused by too much leverage or that type of thing. And we've witnessed this period of time where President Trump has, on one hand, confused people from time to time, but also proven to be somewhat pragmatic when it comes to the rubber hitting the road on some actions and listening to some of the CEOs and things like this that have his ear. Whether or not it's the most recent trade negotiation with China. Clearly, some retailers and some small businesses got to him and said, look, the tariffs as they sit are going to be quite negative, not just for price, but also for the availability of goods. Whether or not it's Jamie Dimon of JP Morgan or whoever the CEO might be, when the rubber hits the road, he's willing to listen to those people. The two positives from a macro standpoint so far this year are the Federal Reserve that still has room to eventually lower interest rates, so the ability to cushion a slowdown exists. And the second is that when push comes to shove so far, there's been some pragmatism on the US government. The two negatives are because of some of the discussion around the Central Bank's independence and the competing objectives of above-average inflation and an unemployment that is worsening but not at a significant rate, and that the central bank might be slow in lowering interest rates. They might be more responsive versus trying to get ahead of it. The second thing is some of the confusion from tariffs and what have you, will there be a longer-term price to be paid in terms of confidence and actual activity in the economy? So far, the markets are acting like there's really no price. And valuation has recovered, even though earnings estimates continue to decline. And valuation is always a bit more art than science sometimes. Without forced deleveraging, a valuation can stay at elevated levels relative to what you might otherwise think. Where we sit today, I don't think the current valuation prices in the risk of this confusion having more of an impact. So as the old saying goes, we're crossing the river and touching the stones as we go.

And I guess, for the physiotherapist analogy here, when I was just flinching with pain, she kept going, and when I actually started screaming out loud, that's when she stopped. So that's that pragmatism around tariffs if we carry it through. But like you say, it's one of those things, where I think, as you said, when you're looking out right now towards the latter part of this year, and markets have to be looking there. They certainly were earlier in the year when they pulled back. When they pulled back, they were looking out. They were saying, if this happens, the economy is going to slow down, profits are going to be down, and down go the markets, and we tighten up valuations as well because there were some other risks on the table. But now you're actually through the period. Markets have recovered. We've got valuations back, as you say. And there's got to be some damage done. You reference Jamie Dimon. I was watching a video of him yesterday where he was talking about it. He just doesn't see how these profits hold up based on what's already happened towards the end of the year. So that just puts us in a spot with lots of volatility, the Fed is only going do so much, and maybe something happens that drives earnings higher, but it sure doesn't look like it's going to happen.

The reacceleration looks more challenging, for sure. The CEOs of banks, they see it better than many investors. They're out talking to their clients every day. They can see people's usage of lines of credit and loans accelerating. They can see spending inside of their giant machines. So if someone's going to see the possibility for acceleration, it's likely to be a bank CEO.

Another analyst I was listening to yesterday, Stu, was talking about this big inventory buildup that we've seen where you saw a bunch of inventory getting stocked up, getting ready for the tariffs in the first quarter, and then that could have a lag effect through the years. Is that something that you're looking at with some of the companies that you're investing in?

For sure. From an economic standpoint, when you build inventory, it actually depresses economic growth. And then when you release it, it generates it. But then eventually, you have to go rebuild inventory again. And that's where there might be some pricing pressures because we've seen some big retailers say, now you're going to actually start seeing the impact of tariffs because we've gotten rid of the inventory that was under no tariffs. And that likely will continue.

So, Stu, let me go back to that point around the piling up of inventories, where you bring those inventories forward, you accumulate, and then you're going to have all that stuff floating out into market. If there's a customer for that, if the consumer shows up and buys, then that would be where profits could hold up. Is that what you're suggesting by the lag and the pushback of growth when inventory is accumulated?

Well, it's just the way that the old GDP formula works: exports minus imports. And that's why some retailers are coming out just to make sure that customers know this is the end of the lower priced stuff. So this stuff should move okay, basically from inventory at the store into inventory in people's basements. It's the next phase where they will restock their inventory and whether or not that sells through at the same pace will be the open question. So we'll get that into the back half of the year. If I'm a retailer, I'm probably not putting quite as much inventory on the books after the tariffs as I was before because maybe I'm thinking about a bit of a slowdown.

Yeah. And actually, this is the week where we're going to see most of the major retailers in the US report their earnings. You have any expectations around what we're going to see there?

I think it's interesting. Home Depot was reporting this morning. It was a sigh of relief. The stock is flat. The actual revenue growth inside the business was not that strong. Your question on tariffs is a good one as same store sales accelerated through the quarter. Will that continue or was that all about people taking advantage of concerns over some higher priced product down the road? Home Depot is an excellent retailer. Their gross margin was not bad. It was right in line with estimates. So they re-accelerate.

And another couple I saw that are up later this week, but a bit different. TJX, here in Canada, which is Winners and Marshals. And they've got TJ Max in the US, and TK Max in Europe. And then Ross Dress For Less, which is the next leg down. These are discounters. When you see them start to accelerate and generate more sales, do you see that as a good thing, or is that sometimes a sign that people are moving down market to save money, an indication that they're running out of money? How do you look at the discount retailers relative to a retailer like Home Depot, which is a big box store with good price, but not the same clearing house that you would see out of a TJX or Ross Dress For Less?

I'm a little over my skis on this one, but the discounters, they're complicated, yes. They normally have very good value propositions. There is a bit of a possibility that they benefit, broadly, in terms of the ability to buy inventory under some of the tariff rules. Just the way that it might all come together for them could be a benefit. That's why those stocks have been pretty good throughout, in addition to being better-value propositions. I think where we go to look for a more cost-conscious consumer is in the likes of Walmart and things like this, which their sales also were not bad. For the pure discretionary type sales, you look at the share prices of Walmart to Target this year, those are quite different.

Yeah, and then we had the news last week that Walmart CEO is saying, hey, it's going to be pretty hard to avoid raising prices later in the year, and Trump coming out and pushing back and saying, don't do that. And again, we're going to have to see how that plays out and then whether the consumer holds up.

These businesses don't have humongous margins either. They're often mid-single digit margin businesses. So it's not like they can eat price increase significantly. It's just not the way they're businesses are set up.

So then the other piece in Canada that'll be particularly important, we're going to get some Canadian bank earnings. Any thoughts or expectations around what's going to happen there?

Well, I think they're apropos for the stock market as a whole. You have long-term results that are very strong. You have businesses that are well capitalized. You've got good current dividend yields. Stocks have done well recently against the concern of some higher provisions for credit and maybe greater loan loss provisions. You have two headwinds in the very near term against an intermediate term that looks more consistent with what people expect from banks over time. It'll be interesting. We've had a handful of Canadian companies report, and the numbers were in line with expectations, maybe a little sluggish, and the stocks went down for a day, and sometimes they went down 2 to 4%. And then a couple of days later, they were back to where they were. So I think that could continue to be the course. The Bank index is back near a 52-week high. And it's interesting. One of the things we like is relative strength. It's back to a 52-week high with the stock market, but they haven't led the stock market yet. So I think what would be interesting is if we can get some of these provisions for credit behind us and people think that we're in good stead there and go back to discussing the capital positions, the dividends, maybe some new government policy that restimulates the economy, and start to think farther out about what those businesses could look like on the other side of the current malaise. You never know if that's going to happen on any given quarter, but that certainly still exists at some point for Canadian banks down the road.

So still lots to watch, and we'll be back next week. We'll have some bank earnings by then, Stu?

Yeah, by next week.

By next Stu’s day, we'll have a pretty good feel for that. So, Stu, as I told you, I just had a very painful morning. I think I'm going to get the right result. My knee is aligned, my hips are aligned. I'm not as old and decrepit as I was when I walked in. But what I am is a lot lighter in the wallet. I had to pay an enormous price for just this one session. And I'm not even sure the insurance is going to get it back to me. I got to go and look at our plan. But I know there's a physiotherapist with a big bucket of cash who's going to be looking to invest. So you, Stu Kedwell, would you suggest that she take that big bucket of cash and dump it all into the market today? Or maybe she takes another approach that you could suggest? I don't know. There might even be an acronym for it. I don't even know what it would be.

Well, yeah, there's probably two lessons in there. The first is dollar cost averaging, DCA, and the second is you should keep going to the physio so that she can keep dollar cost averaging and get a set of nice prices relative to the longer-term opportunity.

Very good. We often come back to that. I think it's been a theme now for a couple of years, Stu, that the dollar cost averaging just makes sense. And we get into a period like this where the uncertainty level has come down a little bit from the peak, or at least the way investors, both retail and professional investors like yourself, are looking at things. It feels like there's a little bit more certainty, but it's still a very uncertain environment. There's still lots of things that are going to happen between now and the end of the year as we sort through this. As you say, self-inflicted issue of tariffs. And it just makes sense for people to ease in instead of dumping everything back. And again, if people have been doing that, you had your big downside. The big thing is you got to keep doing it. When the market's down 20%, it's harder for that dollar cost averaging program. You want to say, well, no, I'll just skip this month. But you don't. And then we've seen the bounce back. But with the volatility that's likely coming, that approach still seems to make a whole lot of sense.

You ask yourself a couple of questions. Are the valuations elevated relative to history? Markets are not unduly expensive, but they're not cheap. So the answer to elevated valuation, are they priced for the current economic environment to persist? Is the answer yes? When you get yes on both of those questions, dollar cost averaging is a great tool. If they're priced below average or they're priced for a recession, then you want to significantly accelerate it. Unfortunately, on the first two questions, that's often the environment we're in. So dollar cost averaging is almost always a great answer. And you can look back with history and say, well, we should have just invested. For long termers, that's likely true, but it's just a great behavioral way to gain longer-term exposure to the stock market.

Now, Stu, just thinking back again to this pullback that we had earlier this year. Say we started dollar cost averaging program right now. The market's recovered. But say the market was to drop back down and move towards those previous lows. Say you decided you were going to put your money in over 12 months, would you accelerate that dollar cost averaging program and move it forward?

The things that would trigger acceleration of dollar cost averaging are significant improvements in valuation and increased odds of near-term economic slowdown. Because then you're getting increasingly paid for the risk you're taking in the near term. So that would be the tools to accelerate it. When we look in our own portfolios and the weakness, you had rebalancing, you have dividends going to work. All sorts of things. We added some equity, so that helped in the decline. I'm just a dollar cost average guy. Just acknowledging in advance that there's always going to be some bullets left in the gun, even if market's bottom, but you do want to try and accelerate it on decline.

And it takes away the need, or maybe even a better way of saying it, the desire or urge to try and be perfect, because it's likely you're not going to be. Even someone as great as you.

I don't know about that, Dave, but with all your physiology or physiography, whatever you call it, elite athlete might still be far in the distance. But considerable progress is being made, I can tell.

Yeah, well, if I can get this knee fixed, I can do some more exercising and then maybe take off some of this weight. The trend is down for me. The long-term trend for stocks is generally up. So that's the good news for all of us.

I think the trend for you is up too, Dave, with your plan.

Well, there you go. So advice on physiology and the market, that's what you get on Stu's days, along with some fantastic infotainment from the always entertaining Stu Kedwell. Stu, thanks again for joining us today.

Great. Thanks, Dave.