Hello, and welcome to The Download. I'm your host, Dave Richardson, and it is everyone's favorite day of the week — particularly someone's mother — Stu's day with Stu Kedwell, co-head of north American equities at RBC Global Asset Management. And we are on video today, Stu. Great to see you.

Great to see you, too, Dave.

You're looking sharp, as we head into a little bit cooler weather when you wake up in the morning now.

Yeah, a little fresher. After the first week of the NFL, I was thinking, you could be up in the booth doing some commentating with that great introduction.

Oh, yes. You know what? At one point in my life, I really wanted to be a sports broadcaster. As a kid, I would sit and practice. I’d pretend to be a sports broadcaster. Different sportscasters actually tell that story of how they used to do that. They’d do that to prepare to become sports broadcaster. Like Tom Brady, who's doing NFL games now, he spent the whole summer rebroadcasting old football games to practice up to broadcast live football games. But earlier in my life, I was actually dating an accountant just coming out of university, and she was doing an audit on one of the radio stations and found out how little sportscasters made and then how hard the journey is to actually get to where you have any degree of success in. And I went, you know what? Maybe I'll go into banking. It's probably better. Not that I'm overly greedy, but just the stability of having a regular salary is sometimes a nice thing.

Well, and it's a funny analogy, too, because when we go talk to companies, investors can be critical, and we always say to management, look, we're just up on the broadcast booth. We're not down on the field to play. And obviously, it's a lot easier from the broadcast booth, versus actually having to be executing and doing things as well. So it's an interesting analogy.

Well, yeah, except that you do have an accountability because you make the call one way or the other, and then there is a win or loss on that for the people who invest with you.

That's true, too. There is a win or loss in the portfolio, but you know, we just use that line when we're talking to management because business is very competitive. It can be tough.

About the stock market, I talk about this all the time, when you make the comparison between gambling and investing. In gambling, the odds are against you. If you're making a bet on that one football game, well, it's somewhat 50/50 if you've got an adjustment, a spread in there. But if you make that bet through someone, which is what you have to do to do it legally, you're going to pay the juice or the VIG. So win or lose, the people taking the bet are going to win a little bit along the way. Whereas when you're investing, the longer you stay invested, the more likely you are to win. Even if you make a mistake in the short term, on the longer term, eventually, as long as you bought something that has quality, you'll make that up and the odds are in your favor. And this is one of the bad things about where investing's gone with new technology and the ability to trade in and out of different investments, it takes on a feel of gambling. People start to think that investing and gambling are the same thing, but they couldn't be more different. And what you want to make sure you're doing to be successful is be an investor, not a gambler. You can have some fun with gambling. There's nothing wrong with that. Or maybe there is, depending on who you are in the audience. But there's nothing wrong with gambling from my perspective. But the main thing I want to do when I'm building wealth is I want to be an investor.

Great point because, as long term investors, getting earnings growth, collecting dividends — and were hopeful that the valuation range that we start with, we revisit it at some point down the road so that the entirety of those dividends and earnings growth accrue to us — what tends to happen on a daily basis, it’s all about the narrative and how the narrative changes. And we have to try and disassociate or make sure that we understand the implications of both, because it is that earnings growth and dividends that get the longer-term job done. But the narrative soaks up a tremendous amount of discussion in the short term. And we were joking before, some days it feels like that scene from the Princess Bride when the guy outsmarts himself to two glasses of poison and says, if this happens and this happens, then I should take this one. But then if you were thinking that you would have done this and then I should do the other, but if that was the case, etc. He goes back and forth and back and forth. The markets have been a little bit like that around soft landing and recession and which areas of the market are working on any given day. That's the short-term noise that investors need to find their way through.

Yeah, and we're just in one of those periods. And hey, big surprise — as we talk about the chill in the air — the chill in the air normally starts up when you start school in September. And here we are again. Is it going to be a soft landing? Is it going to be a recession? Where exactly are we going? We've got no earnings for a little while. We've got an election and debates and everything going on in the US. So there's lots of reasons for volatility and sure enough, that's exactly what we're seeing. And that whole «are we, aren't we going into a recession?» And that story is such a great illustration visually in film of how that could play out in the market's mind around what's going to happen.

And I think there's a couple of things at that. First off, the reason that that conversation is taking place, we've talked a lot about the inversion of the yield curve, and the two-year interest rate in the United States finally went below the ten-year interest rate, which is one of the longest inversions that had been there for some time. And it's only by a handful of basis points, but it still is a pretty interesting event. And it's often when the yield curve inverts back to a positive slope that that's the period of risk around the economic slowdown, because markets are trying to gage how speedily will stimulus arrive. Will there be an earnings slowdown in the interim? And that's one of the risk windows that opens. When we go back and look through hard landings and soft landings, I think there's a couple of things around here. First off, when people hear soft and hard, they think like plus five or minus five or something like this. The range of outcomes is not likely as wide as it's been in the past, regardless of whether or not it's a soft landing or a modest recession. The second thing is, one of the key increments or key attributes that we'll be watching for in the coming months here is once you get the first interest rate cut, the path of unemployment becomes quite important. And in a soft landing, unemployment will maybe meander a little bit higher, but it'll peak within three or four months of that first interest rate cut. Versus a harder landing where you tend to get a more dramatic move upwards in unemployment. And that's going to be a really important element. The second thing is we look at some of the early cycle indicators. Early cycle is housing in the United States, where the home builders have been a stronger group. It can be some of the financial stocks because as the yield curve goes back to a positive slope, particularly in Canada, but generally speaking, that can be positive for financial earnings. So when we’re debating the elements of what the economy will ultimately look like, the narrative can start off with, well, valuations are elevated, earnings expectations are high, we’re going into the risk window. But that’s where the Princess Bride part comes in because then the central banks are going to lower interest rates, interest rates are high and it's not like they're down at one and they can only move to a half. There's a fair amount of room. That room should create the stimulus and then the market can then migrate from periods of concern to what it could look like on the other side. And that's the way that the story unfolds. But the period that we're discussing that story can be a little bit more volatile and that's what we're in right now.

So much to unpack there, that point around the soft-landing vs recession that you were talking about. We just do the math, and we pull out the textbook — and we'll do it when Eric Lascelles is not here because just in case we're not as precise as he would be, he'd probably come in with some comment on this — but if the definition of a recession is two consecutive quarters of negative economic growth. So that could be -0.1 and -0.1. If we had plus 0.1 and plus 0.1, well, then it's not a recession, it's a soft landing. We've got one soft landing, one recession. And maybe it's not 0.1 versus -0.1 but maybe it's plus one versus minus one or minus a half percent. Again, you're not talking of that plus 5% or minus 5%. This massive range between where we're likely to come out this time. So you don't want to be overly negative around where we're headed economically because central banks wanted to create this slower period. You needed to do that to get inflation down. And again, they've got lots of ammunition because of how high rates ultimately went to take rates down considerably to provide a lot of stimulus into the economy in the event that things even start to look like they're slowing down too much.

Yeah. And the thing that's also important is, you have central banks that can provide the stimulus but there needs to be dry kindling for that stimulus to work on. I mentioned things like housing where the number of houses built has not kept up with maybe household formation or household formation sits ready to improve. Clearly there's certain areas of consumption that have been held back in the last twelve months. There are areas in different income cohorts that could certainly improve. There's the ability to do it and there's also an area that could get better.

Yeah. I haven't held back any consumption as people can see, now that we're on YouTube, and you can see I'm having a hard time finding clothes to wear on these broadcasts. It's getting that bad. I'm going to have to cut the consumption. But that's my own inflation issue, which I've dealt with my whole life. We talked about the different buckets of stocks and then how you see each of the three buckets through a period like this. As we've seen those rates, the longer-term yields coming down. Midterm, those rates have come down even more. We've got short term rates coming down. You would have expected a certain group or bucket of stocks to do well in that environment. And sure enough, that's exactly what's happened. Right, Stu?

Yeah, just as a reminder, those three buckets are big growth stocks, what I call quality companies that have some cyclicality — like a bank has some cyclicality — and then there’s the third bucket, which is very interest sensitive, quite stable and durable. Third bucket has done well. The second bucket has done pretty well. Whether or not there’ll be enough interest rate cuts — because there’s a fair amount factored into the yield curve — whether or not there’ll be enough to really propel those valuations of the third bucket farther, time will tell. That second bucket looks still quite interesting to us, where valuations are reasonable and there is the ability to accelerate earnings growth over time. And the nice thing, as you pointed out in the original section, was that group of stocks compounds capital over long periods of time at attractive rates. We often talk about trying to pick up options inside of the portfolio, with positive things that can happen. Well, the long-term positive nature of that bucket of stocks is the option that never expires, because eventually those quality businesses figure out how to grow their earnings. And then that first bucket is where a lot of excitement has been. And the growth bucket can go for some time. I was joking that the best time to be in that bucket is when someone says, how big is the growth? And you're like, it's big. Like how big? I don't know. It's big. Once you can start to size how big it is, it's not often as much fun. The funnest part goes when I don't know how big it gets. And we're getting into some periods of time there where things are getting a little bit more quantifiable so that we can then compare, is there enough growth relative to some of those valuations? I think that's been a dynamic that's been developing over the last three or four months. It doesn't mean that there still won't be plenty of it. It's just like anything. The anticipatory stress is often worse than the actual stress. The anticipatory excitement is often the best part before the actual event, too. That's a feature of everything, but it's definitely a feature of markets.

Yeah, well, we're just hoping it's not a feature of our listeners because I think for years they sat and said, just how big are the heads on these two guys? And now they can actually see they're big, and it's not that exciting. We're actually looking at hiring some models to do voiceovers for us. But I guess, Stu, this would be what we would affectionately call the Stu spot of the market, which is you rearrange the letters in «sweet». It's the Stu spot, the sweet spot for where you like to invest, isn't it? These are the stocks that you really like, and things are turning around and, provided we have a soft landing, that should really favor the kind of companies that you really like to invest in.

Admittedly, I'm a bucket kind of guy. I love that those companies really lend themselves to scenario analysis. And the reason that they do is, first off, they're good quality companies. They're good management teams. Management's always trying to figure out how to make the business better. And when we can find those businesses and they're just slightly under earning relative to their potential, we know that management is figuring out how to get it back to its potential. And if we can get them at reasonable valuations, then that's pretty good for us over the intermediate term. So that bucket is, in my mind, the ticket to ride for a long-term investor.

Yeah. And that's when we get those real lines in the sand that are about to happen. In fact, when we're taping next week, we should be in a position to have a pretty clear view of what the Federal Reserve is going to do. So again, you've got those important lines historically. The first is the first Fed rate hike. Then the point where the Fed says we're finished raising and now we're going to be flat for a while. But then that critical one that we're about to hit is that one where the Fed makes its first rate cut. And as you say, another one is that point where you had an inverted yield curve and all of a sudden it starts to slope up higher and actually then we start to add some slope in there. So these are some important lines to draw for investors and then to look forward, and where we are a year from now, thinking about where we're going to be again, past this US election, past a number of different things that are creating that volatility right now in markets. And it may not be a bad spot, right?

Yeah, I think timing is always the hardest part. And I've been around long enough not to be involved in those predictions because that's a tough game. If we get through some of this uncertainty, there's the ability for earnings to grow in the long term, but maybe to reaccelerate in the short term, and the valuations of a bunch of those stocks are still reasonable. As I say, that's a pretty good setup for the intermediate term investor.

So there you go. So make sure you're taking advantage of your own Stu spot in your portfolio to get it positioned right for the next little while. Traditionally, when we get into the fall and then into what you'd call the RRSP season, which is in January and February, this is where Canadians tend to take a look at their financial plan. They tend to take a look at their investment plan. They tend to think about where they are in relation to the big picture financial goals, in particular retirement. And so it's a good time for everyone listening to take a look at that and make sure that you're comfortable with where you're positioned for the next year, but more importantly, for the next 10 and 20 years to make sure that you reach those long-term goals. And Stu, we always get some value in terms of thinking about that from listening to you. So, Stu, thanks again. We'll check in with you next week.

Great. Thanks very much, Dave.