Transcript
Hello and welcome to The Download. I'm your host, Dave Richardson, and it is a post-election Stu’s Day. Although I guess the US election is, coincidentally, on a Stu’s Day every time.
Yeah. Well, they know it's a big day.
They know it's a big day. And then speaking of big days, Stu, we got a big day going on in the markets. Now, did you stay up late watching?
I'm a get-up-early guy. It looked like it was headed in Trump's direction. When I went to bed, it wasn't confirmed. But then I got up quite early just to monitor some things and have a look. And it's always interesting around these types of events. For all the discussion, I like to go look at a variety of price action, and I almost make a list of my things. If I look at ten things and I wrote them on a piece of paper, I might say what I thought would happen. And then go look whether or not that's exactly happening. So as an example, seeing the US dollar be strong, Bitcoin be strong, a 10-year bond weaker, the S&P stronger, those all would have been predictable things on the back of it. Then I like to write levels down at the impulse of the move. Some of the pricing that might have been seen early in today's trading, I like to write those levels down and then see, well, how does the day react relative to those impulses across a variety of things. You'll see boatloads of commentary around the election, the economy, what this means. And there's a lot of things that need to be decided as the new administration rolls out and what have you. But I think in general, the themes that have stuck in the stock market through the day haven't really fade or anything like that. The likelihood for some lower taxes, probably a bit more slope in the yield curve, more M&A activity, more capital markets activity, less sand in the gears on regulation, a variety of things like that. That's been pretty consistent.
Yeah. And then the speculation of tariffs, which is what drives rates a little bit higher.
Yeah, of course. Great point.
And again, that strengthened dollar is one of those themes that's filtering through everything along with the cryptocurrency. But it has been interesting to watch. We're taping this at about 1:30 Eastern time in Canada. We opened up strong. Then, as you said, the stuff that was winning and you would have thought was going to win has continued to drift higher through the day, which again cements that idea of what those themes you might have thought were going to carry the day, have continued to carry the day. And I mean, for that matter, I guess we've talked about this a little bit in the last few weeks that you were seeing those areas pick up some strength or display some weakness, even pre-election. The overall stock market, not all the way, but seemed to be a little tilted towards this being the result.
Yeah, I think that's bang on. The one thing that we look at a lot is, where are earnings improvements taking place? And by which sector? And the market? And financials had a very good earnings quarter. So they already were starting to percolate in the stock market on their own with some of the themes that have maybe been accelerated by the election announcement likely to take place. Those things are already strong. The things that tend to be strong; the long nose of the stock market has sniffed out something. So when they get confirmation, they really — for lack of a better word — explode to the upside. When you see very large financial institutions up 8, 9, 10, 12%, it's pretty significant.
Yeah, I was doing a speech here in Vancouver last night. We had a great crowd out. And obviously, at that point in time, one of the advantages or disadvantages you have as a speaker in that situation is it's 10 o'clock Eastern when I'm doing a speech here. But it’s 7 o'clock Pacific time. So you've got a little bit more sense of the way the election is playing out. And one of the big things that I've been reading about was the idea that when you have an election where the general perception is it's too close to call. So there's uncertainty around the outcome, and that is definitely the way we came in. But then you have a very clear decision coming out of that election, one way or the other. Then, you tend to see a pop in markets. Now, the difference between the Trump win and the Harris win, you likely see a pop in both. Maybe not quite as much with Harris, but I mean, that's all debatable. We'll never know that. But different companies are viewed as winners or losers. As you say, you sketched out what you say, well, if a Trump wins, it's going to be this, this, and this. If Harris wins, it's going to be this, this, and this. Then you've got your winners and losers. Obviously, on this day, with the fairly clear victory, you have to say, you have a big move, right?
Yeah, and across the different orders of government, too. It's pretty clear. I think we'll see how the bond market persists. That is the one interesting thing. People say, what's interesting about today? Well, the 10-year yield is actually a little bit lower than where it was at eight o'clock this morning. Versus the market has kept roaring upwards. I think we're likely to see more slope in the yield curve than we've seen in some time, a more persistent slope. But the actual level is still open for discussion. Go ahead…
I was going to say, I actually had a question from an investor last night, and you can likely provide a little bit more color to this than I can. But we talk about financial institutions liking a steeper yield curve. So you've seen the Canadian banks do very well, and that was part of the discussion I just had with Scott Lysakowski on another episode of the podcast. By the way, subscribe so you can see all of our post-election coverage from all of the great minds of investing that we get to spend some time with on the podcast. Click «like», or subscribe, and you'll get all that content. But we were talking about how that steeper yield curve is better for banks. Why is the steeper yield curve better for Canadian banks And then I guess the smaller regional banks are the ones that are really popping down in the US.
You're funding at a certain level. And even though you can try and match fund with the exact term of your loans, there's often a little bit of a mismatch. So when the yield curve is very flat or it's even been inverted, you are really just picking up credit spread. You're not picking up any term premium through the bank's balance sheet. And when you get a little bit of term premium and the yield curve has a positive slope, it's just a little bit additive to the overall income. And then not only is it additive to revenue, but it has no cost. You don't have to pay employees anything more. You don't have to do all sorts of things. When I started my career, it was the late '90s and the yield curve had a positive slope for some time. And US financial institutions traded at higher multiples for an extended period of time. When you see these big moves, is it potential for lower taxes, part of it is more activity in the capital markets, but also part of it is saying, well, maybe the yield curve could be a little bit more favorable for a longer period of time.
I'm going to say on each of these podcasts that we're doing post-election, if you're coming here for political analysis or political reaction, you're in the wrong place. There are hundreds of podcasts, thousands of podcasts, maybe even a million podcasts, where you can get political reactions, left, right, center, Canadian, US, all around the world. We're just focused on the potential impact for the market and sharing information with you that's going to help you make decisions around your overall financial plan and your investment plan. So, Stu, as we were coming into this, we say the markets were tilted a little bit, not a big commitment, but a little commitment towards what they were calling the Trump Trade. And then you've seen your big move in that today. Coming into that, were you matching that in the way you were positioning your portfolios, or was that not something you were really going to play? Because you'll get the outcome, and then you'll figure out what you need to readjust in the portfolio at that point.
Well, I wish I had a great simplified answer. It's a collection of all that. I do think the one area that, thankfully, we've been a little bit more favorable on has been the financial stocks, and we hadn't really made any adjustment there. So that's been helpful. When we think about the markets as a whole — and I know you have Eric on, our economist, quite frequently as well — you're always trying to figure out what is the thing that I really need to distill down and focus on. And we've been in an environment where valuations have been fuller. It started off with just a handful of stocks, but then even the equal weighted stock has done pretty well, and its valuation is also a little bit fuller. So you get into a situation where what we call the earnings yield, which is the inverse of the price earnings multiple. So if the price earnings multiple is 20, then the earnings yield is 5. And when that earnings yield gets close to the 10-year bond, what you become very focused on is earnings momentum, earnings growth. And then we break that into two buckets. There's one component that's very artificial intelligence related. So you can see the intense focus on how much CapEx is there going to be for hyperscalers. Is that going to continue to grow? And then there's the broader market, which as we've talked about in the past, has been weighed down by some interest rates and things like this at this juncture. So when we see the interest rate environment, it's been all over the map, but generally within a range, having revenue growth becomes pretty important to those earnings streams. And I think that's why you're seeing a big reaction in small caps today and other things. So I would suspect that in the next little while, the two very important factors will be understanding AI CapEx and understanding the earnings trajectory of the rest of the market and looking at that each week for clues that that is continuing to march forward. Financials have started. In the United States, in particular, they've been stronger. After financials, within those earnings, that S&P 495 earnings pool, it hasn't really displayed itself yet. So we'll be looking for that. But I think going forward, sometimes you need to be very focused on the economy, sometimes you have to always try and figure out, well, where is the feature of the market? And I think the feature is going to be around those two discussions, AI CapEx, if it decelerates relative to expectations, and then watching the broader markets earnings pool. Is that going to be up to? Can that strengthen further as we move into 2025?
So, Stu, one of the things that we've been talking about, the different buckets of stocks, and one of the buckets of stocks that we had talked about were more interest rate sensitive stocks. And this is more purely on the play off of the yield that's being generated. So I might say like a REIT, a real estate investment trust, and your longer term interest rates. And clearly that's an area that is not benefiting today from what's happening. Is that something that you expect to continue? And again, were you adjusting for that, or do you make an adjustment for that? Do you think maybe even this is creating an opportunity in that bucket? Because maybe yields don't rise. You saw the market open this morning and they drifted down, maybe what we've seen on yields might be a bit of an overreaction.
Yeah. Every bucket has its scenario, right? So when I look at those stocks, we've probably been deemphasizing that bucket in the last little while. So what we want to look for there is we want to get a valuation that we think is maintainable in 4 to 4.75 on the longer term bond or something like that. So if you get into that type of valuation, then you're going to collect a pretty healthy current yield. And the way that those businesses work is you have to understand their interest costs, but normally they're growing their earnings by 3 to 6%. But if we can collect 4 or 5 right off the top, and then the dividends can grow by, again, between 3 and 6%. As long as we're comfortable that the valuation is not going to chew through a portion of that return, then we'll come back to that bucket. And that's the way that we've always thought about it. That bucket tends to have more change in valuation than actual change in cash flow.
Sure.
And so that's how we're evaluating that. And so those stocks are a little bit weaker today, and we're busy at work thinking through those scenarios in that area.
So we get a day like today. The markets, particularly US markets, just jump right out of the open and continue to rise. So I'm sitting there. Maybe I was sitting on the sidelines because I felt uncertain about the election and the result that was going to happen. I was seeing volatility in front of it because volatility picked up. That's the one thing. Volatility is way down today with the market move. If I'm an investor, am I too late? How do I sit and watch things continue to move like this and not be tempted just to jump in like I'm jumping for a nice swim? It's just so tempting to want to be part of it. And you get that fear of missing out, when you see things happening like this.
Yeah. So I don't know if that was the set up for dollar cost averaging that you were hoping for, but that sounded pretty good to me.
What? I didn't even know. I had no expectations, Stu. Seriously, it wasn't a tee up at all for dollar cost averaging.
So when the stock market's down, when the stock market's up, we're going to go through, I think, a period, even watching today, where there's more bullish commentary around a variety of things. At the end of the day, stock markets are a function of valuation and the earnings growth. And the earnings growth is what drives the long-term performance. The short term can be change in valuation. There's some enthusiasm today because earnings could benefit from maybe lower taxes and some things like this. That tends to happen quite quickly in the stock market. I'm still in the camp of there'll be twists and turns. There'll be lots of chapters in this story. And that's why dollar cost averaging is such a great way to go.
Well, I wanted to tee that up because next month, very shortly, we're coming up to our fourth-year anniversary of Stu’s Days. And if anyone who's listened and been there from the start, has listened to Dollar Cost Average Boy on dollar cost averaging, wow, it's been just a spectacular four years for using that approach. And again, with a discipline attached to it, it just allows you to play the market whatever way it's swinging, but take advantage of the overall trend over the long term, which is generally going to be up. So it’s almost a no-brainer. I really, really hope, for all the listeners who have been there right from the start, from the very first Stu’s Days, that you walked away with that strategy. Across a hundred, probably a thousand of the other great ideas, great advice that Stu shared. But that's one that if you've ever done it for an extended period of time on any particular investment, you just know how well that works if you just stick with it. I see the smile on your face because I know we're talking about something you believe in.
Yeah, 100%.
So, Stu, thanks again for getting on today after the election for a special Stu’s Days. And remember, the first Stu’s Day in November in the US is election day.
That's right. Every four years.
Well, in the interim, too, there's stuff.
Oh, yeah.
So Stu’s Day continues to be the most important day. Thanks for joining us again today.
Okay. Thanks, Dave.