Hello, and welcome to the Download. I'm your host, Dave Richardson, and it is Stu’s day, finally. Did we do another Stu’s day earlier in August, Stu, or is it back in July since we last got together?

It might have been the first week of August, Dave. It's been a while. I missed you, Dave.

Well, thank you. I don't want to tear up on our first podcast back, but it’s kind of getting emotional here. But you're obviously refreshed and more clear in mind since you got back from vacation.

I've read some good books and vacation always gives you some perspective. When you sit here each day and you're trying to figure it out in the very short term, and then you come back after a period of time and some things have changed, but a lot hasn't really changed, it does give you perspective to think a little bit longer term.

Yeah, and maybe we'll do that today, Stu, because we haven't been on for a few weeks. We're going to be much more regular through the fall because this may be a fairly consequential period in markets, both equity and fixed income. There still remains a lot going on, a lot of uncertainty. But why don't we take a step back, like you say, just take a deep breath and take a look at where you think we sit right now across a number of fronts, lay out the picture and what may play out over the next few months. And then next week we'll dig into approaches that investors might want to look at. Does that sound okay?

Yeah, it sounds great. As you know, I got a lot of sayings on my wall, and one favorite is my partner saying: across the river while touching the stones. Which means you're just preparing yourself for a number of different directions. From an overarching standpoint, the things that are taking place that take place over time in many cycles. So you have inflation peaked. It's coming down quite rapidly, actually, in response to significant interest rate tightening. That last stage of inflation, getting right down to 2 to 3%, brings into question how long short-interest rates will stay around this level. Not really. Do they go much higher from here? But how long? The second thing is this discussion over soft-landing recession. The market is kind of priced for the soft-landing scenario. And that one is a little bit more difficult because when you load this much tightening in, you're going to get some implications and we start to see some of it. In Canadian consumer land, some retailers know there's been a noticeable shift in tone on the demand side. The Canadian consumer sees it a bit faster because of the way mortgages reprice versus the United States where they're still bearing the benefits of having locked in for some time. But the tightening is in the system. So, we move from the macro view— where inflation is coming down and the economy is slowing— into the bond market, where you still have an inverted yield curve, which is a note of caution over the future strength of the economy. That yield curve is not quite as inverted as it used to be. During the next phase of the cycle, ultimately, in all likelihood, that yield curve will go back to positively sloped. It can be during that period of time that the economy really does slow down, and that's what triggers that movement. Some people call it the unicorn, where the yield curve inverts or goes back to a positive slope in the reverse way, with longer term rates rising. It doesn't happen as often, but you need to be open to that possibility. But in all likelihood, I think the economy will likely continue to slow. Will it have enough juice to drive the earnings growth that the stock market is taking into consideration? Because, say we do $220 of earnings or something like that this year, the current consensus for next year would call for probably a 7 to 9% growth. It would take a pretty reasonable economy to deliver that. And then the multiple that we're ascribing to those earnings is also healthy, around 18 and a half times. So it's hard to make the argument for going all in on risk at this juncture, but markets are markets. And the hardest thing to predict in the short term is the multiple. And we know that. 18 doesn't necessarily disrupt the longer-term investor. If you're going to invest for ten years and you're paying a 20% premium to that 15 number, that would cost you a couple of hundred basis points a year. Manageable, but it still brings this discussion around, if we get a slowdown, if we get a modest recession, those earnings are harder to come by and the multiple likely contracts. So that's the delicate balance in the near term for the stock market. As always, the key to being a good investor is to be open-minded. From an odds-based standpoint, we've laid out some of the things that we're worried about. But you have to be open-minded. And that's what I mean by crossing the river and touching the stones.

As I've been talking to Eric— and I think we touched on it the last time we got together—, it's been quite remarkable to see the way the typical analyst has shifted over the last two or three months from virtual certainty of a recession— most people thinking that a recession was coming— to now, seeing the odds very low, from a lot of people. And you've seen the market saying that— the stock market anyways— over the last six months, as it’s rallied. It stalled a little bit now because, like you say, we’ve got a lot of figuring out in terms of exactly where we land. But I can't recall a period where you still have everything set up in terms of higher rates that are still building into the economy, inverted yield curve, clear signs in so many areas that the consumer is stretched, and yet people pulling off a recession prediction.

The funny thing is that the stock market so far this summer has peaked the day that one of the last big US banks moved to a softer-landing-type scenario. So you get into sentiment as well at this juncture. The problem with this soft-landing recession-type call is that when you go back and look through history, quite often the movement from a good economy to a recession doesn't necessarily take place over many quarters. It happens, like one quarter to the next. You can go back through history, and you can see one quarter of the economy was growing at 2% and the next quarter was minus 1%. It tends to happen quite quickly. So that's what makes this a particularly challenging time.

Yeah, I do like the way you position it, and I guess this is what you would say to advisors and investors. Like you said, we're still not at that moment where you're all in, where you're just pushing money into the middle of the table and saying, hey, things are going to be better, we're through all of these issues, we've gotten through any economic slowdown we're going to have, we can see the other side and earnings starting to rise, interest rates starting to fall, and away we go. We're still looking at an elevated P/E multiple on the market. Some uncertainty about where earnings are going to be. And so that still breeds caution. And then I'll leave it to you to recommend maybe an approach that you would use to work through an environment like this.

I think the way you framed it is quite good. I could be at risk, saying I'm wearing a chicken suit, because I'm not prepared to bet on it. But not totally yet prepared to bet against it. That's why the instruments are at full attention in terms of monitoring where we're going here. There's enough evidence in the pipeline that there likely will be a slowdown. But there's also evidence that inflation is dropping reasonably quickly too, so there will be some form of valuation support while that takes place. I think once we get through this, we're going to get a really nice set up. It's just the question if it will present a really good opportunity or if it will just be more mundane. So that's what we're thinking about a lot. And to your earlier point, it's been a month since we talked about dollar cost averaging, which is about as long as we can go.

Dollar cost averaging, what's that, Stu?

During uncertain times, it's hard to think of a better tool in the toolbox.

Yeah. And again, if you started a dollar cost averaging program— I think it was 18 months ago that we really started to pound the table on that approach—, you've done fairly well. And again, continuing dollar cost averaging, it protects you in the event we've been a little bit over-exuberant in terms of not having a dramatic slowdown or a recession and it protects you if there is any downside in the interim. I think another important point— I don't want to miss it or bury it into everything else we're saying— is that the setup coming out of this begins to look pretty attractive, right?

Yes, it does. Because you'll eventually have declining interest rates against the backdrop of improving earnings and that will be a pretty good setup for sure. And the last point too, which we can delve into in weeks to come, is that when I look through our portfolio, we can have these headline discussions which we've just had, but between the market full of stocks versus the stock market, there is always things to do. There are always things that are discounting bad news. There are all sorts of stocks out there even though the indices are plus or minus 5% from their high. There are all sorts of stocks that are very good companies that have experienced a much bigger change and could be very interesting as we move forward. And the last thing I just wanted to touch on— because we have talked about technical analysis in the past—, it fits with the dollar cost averaging and it fits with the patience of watching this take time. The markets broke out. I remember we did a podcast on them breaking out at 4200 or 4300 on the S&P, and we said at the time that if it broke out, it almost always revisits the breakout at some point, which it kind of did last week. So it's a long game. And commentary, unfortunately not unlike ours, tries to play it in very short-term increments and we're pretty much focused on the longer term.

I think I can honestly look back, Stu— we've been doing this for about three years now, these Stu’s days episodes on the podcast here— and I can't think of too many periods historically where you would have been better served not focusing on the long term. This has been the kind of market where you wanted to do all of the basic principles of investing: starting early, investing regularly, having the right diversification, having a plan, focus on the long term, investing enough. You apply all those principles and you've done really well through this environment because it's presented opportunities for you to take advantage of. And again, if we get to that point where you're in a much more positive setup, doing all those things, if you've done all those things over the three-year period that we've been talking about, you really set yourself up well for the next 10, 15, 20, 30 years.

Yeah. 100%, Dave.

Wow, you really are docile, coming back from vacation.

We need a Dave’s days.

I think most of our listeners would vote against that. We all know who the smart guy is on this podcast, so we'll continue with that. But, Stu, great to see you again. Glad you're doing well. Looking forward to continuing to get together through the fall because I think it's going to be a really interesting fall and that's a really great reset for people around. Where we are and what we're looking at and what you should be thinking about right now. So thanks for that, Stu.

Well, it's great to see you, Dave, and I'm glad you've had a good summer as well, and I can't wait to get back at it in the fall.

Excellent. Take care, everybody.