Hello, and welcome to the Download. I'm your host Dave Richardson, and it is Stu’s Days. And Stu, summer starts officially June 21, but here in Canada, because of the whole climate thing and that we're really north and cold country, it really starts July 1. And so, this is our first summer Stu’s days. We took a couple of weeks off— maybe even more than that. What have you been up to?

Well, the beat goes on here. It might be the dog days of summer, but there’s a lot going on. It's been a pretty interesting time in markets. The stock market has broadened a little bit. There are more things participating, which is good. So there's always something to do. There's always a bull market somewhere, as they say, Dave.

Wow. So I heard some rumors around the office that you're a little jealous that I describe Eric Lascelles as the hardest working economist in Canada, and that I haven't labeled you with the same kind of level of work ethic. I thought it went without saying that I know you work hard, but you clearly felt a need to throw that in, that you're working while everyone else is relaxing during the summer.

I'm hard at work, Dave. I'm a 24/7 guy.

I actually know that. So we'll continue on with Stu Kedwell, the hardest working North American equity manager in Canada. And again, as you say, the markets have just been astounding in terms of what they've done so far this year. I was just crunching the numbers yesterday. I think the TSX is up about 14 on the year, coming into today— we're Thursday July 20, just to timestamp it. The S&P is coming in from its low in October to now up over 30. And then the Nasdaq is up over 40 from its low in the fall. So incredible move. And then we move into this part of July. And as you say, it is an active time because we are getting a lot of earnings reports and earnings always give us a view on what's been happening. A bit of a rear-view mirror. But when companies report, they talk about the way they see their business unfolding over the next several quarters. And I know one of the reasons why you're up all night is because companies report 24 hours a day around the world. What are you gleaning from what you've seen thus far?

We came into this quarter and the expectations were that earnings would be down, and they are. So the bar was pretty low for this quarter and earnings have been a little bit better. There are some things that don't really surprise you. Airline stocks have really blown things away. But for areas where there was concern in the market, some of those reports have been no worse than people maybe expected. And we talked in the past about the importance of capital markets reopening and we haven't had some of the big tech companies yet and things like this, but we have gone through most of the banks. And one of the signs has been this early season or early cycle indicator that capital markets activity is starting to rebound. Money is starting to move, capital is starting to be raised, those types of things, which is pretty healthy for the economy. So that's probably been one positive. I would definitely say the slate of capital markets earnings in the last quarter was nothing to write home about. That was well known. But some of the green shoots, some of the activity starting to pick up in that area is quite interesting.

I guess the first wave out of the US were the banks. And I know you pay a lot of attention to that and that's where you're talking about some of the capital markets activity. But beyond that, anything in the bank earnings that gives you reason for optimism or pessimism around the economy?

Maybe a little bit of optimism in the short term. Unemployment has remained quite low, so the provisions for credit in traditional consumer lending categories have remained quite low. We tend to focus a lot on the big money center banks in the United States, like a JP Morgan. Money center means you do lots of different activities as many of our Canadian banks do as well. If you were just a commercial lender, loan growth is slowing quite significantly, as you might expect during this period of time. But some of those investment banking areas which had really slowed, maybe they're through the worst and positioned to pick up a little bit. So those are some of the things we focus on. In this particular instance too, the US is likely to come out with some new capital rules by the end of July, which we want to be aware of for Canada. I think this is going to be a very lengthy process. It's probably going to take the better part of two or three years to work out the kinks and have the final deadline as to where they're going to be. But US banks are going to become more capital intensive, which we just need to understand. They all seem positioned to either be there or earn the capital to get there. So at the money center level, it’s not that concerning. The next step down in what they call the regional banks, where maybe you don't have as many business activities, where you're really more focused just on deposits and lending. Those areas of the business are a little bit slower because deposits are costing more. Capital ratios likely need to move higher. There are some intricacies to the way they were regulated that are going to maybe change a little bit more. We thought a lot about that, but it's not a huge focus for us.

So when we add up what you've seen thus far and what companies are saying about where things might be going, and then we look at a market that's up significantly this year— maybe some of the lagging areas are the material sectors that were so strong last year, energy and materials—, so I'm sitting here and I've been slow to move into the market, I've been a little bit skittish about the stock market because of all the worries about a potential recession and what comes out of that. Am I too late to get in? How do I think about where we go from here? Valuations are higher but rates are higher; inflation is down. How do you think about that in terms of putting together an investment strategy for yourself or how people should think about it?

It's a great point. As an investor you're always looking in your toolkit for which tools may be apropos at a certain time. From a fundamental standpoint, while we talked a lot about earnings, since we last spoke through the early part of July, we also got a lot of encouraging data on the inflation front. And there is this longer-graded framework that we've been working for that inflation will peak and come down and that appears to be taking place. Interest rates then follow that peaking and are coming down. That is generally still taking place. When you're in the 7th or 8th inning of a game, there's always discussion if you’re going to extra innings. But I think the meat of the move is over. Interest rates are at a level where putting money to work into the fixed-income market is quite attractive. We're collecting very good coupons. And if rates do decline, we'll get some capital gain with it as well. And then from the equity standpoint, a lot of those great returns you mentioned have been fueled by a handful of stocks until recently. And those stocks remind us of how good the businesses are. Just a couple of days ago, Microsoft came out with some new pricing that included ChatGPT, and they're going to charge 10 or 20, or significant more dollars per month for using their suite of products with AI in it. So that reminder certainly helped the performance of Microsoft on that day. But to me, the more interesting thing is a little bit of the broadening of the market. The earnings picture in front of us today is not one for the next couple of quarters that the expectations are set reasonably. But then we have this dynamic where the slope of the yield curve is negative, which often leads to some type of slowdown. We have capital markets activity restarting, which is good because that means businesses are getting access to capital again. They can do things. And we have valuation in that cohort that's not challenging really, in the context of the longer term. So we're spending a lot of time in that area of the market. And I think we're going to make some pretty good money there over time and that's what we're thinking about right now.

You made a great point when we were talking just before we started taping— and we've asked our friendly producer Nancy to start taping our pre-conversations, because they may be more interesting than what we actually put on tape, although I know for the listeners that's probably hard to believe—, but you were talking about this idea. Just as I quoted at the front end of the podcast, I can track the TSX, I can track the S&P 500, I can track the Dow, the Nasdaq, stock indices every day of the week. But there's not a similar bond index that broader investors are tracking that closely. I can look at my stock price very quickly. I know how much it's moved from the point I bought it or how much I make when I sell it. If I own a bond with a particular coupon rate and a particular term, do I think about the value of that bond? Do I think about the coupon rate? It's just not as upfront. So people kind of miss that. When you get up to these 5% rates of interest, you're earning a nice little coupon, and then with the expectation that rates come down, you get those capital gains. But even if rates go up, they're not going from zero to one where you're earning virtually nothing as you take a capital loss. Now, you're at least earning that 5%. And so, if rates end up backing up a little bit more than expected, at least you're earning something. And then of course, you can still roll over the other side. So that fixed-income piece is, I think, what a lot of investors— at least ones that I'm talking to, and advisors that I talk to as well— are somewhat missing.

Yeah, I think that's bang on. You buy a stock for 10 and it goes to 11. You buy a bond for 10 and it pays you 50 or 60 cents of interest, but it's in a different part of your account. So you don't always marry the two together. That is a big difference in this environment. And that's plain vanilla. There are some different credits that I know the teams have been able to find where the returns have been even better and then that gets back to that. Early phases of capital markets reopening; those are normally times for businesses that need to IPO, businesses that need capital, where the first leg of that is normally a pretty good time to be putting money to work. So that's where we sit today. We've talked a lot about how a stock is a two-legged stool: the valuation and the earnings. Although I did mention I was extremely hard at work, I may have been in a golf cart a couple of times. In your car, when you take your foot off the accelerator, the car keeps going. But in a golf cart, when you take your foot off the accelerator, it stops. There's this notion that when the Fed is lowering interest rates and they're adding liquidity, that's positive for valuation. And when they do the reverse, it's negative for valuation. And we saw a lot of that last year. But as you get to that maximum negative part, which we're in the ballpark here, it doesn't end up being the same impact. It has second derivative. So the rate of change now is working in your favor. So that has come and passed. The one side of the equation is in reasonable stead. The second part is this earnings thing. And that's where we're the most focused on as we move forward. Investing over the long haul, the earnings growth is not very volatile. It's around 6 or 7%. In the short term, it can be a little bit more jumpy, though never as much as stock prices themselves. But as we get into the back half of the year, we're going to be double checking the earnings expectations and the earnings estimates of the businesses we own. Do we think the current estimates for the businesses we own are in good shape? Can they be exceeded? And I think the most interesting thing in that broader pocket of stocks is that we're starting to see a few things where this could be a little bit better and that could be a little bit better. And those valuations are not unreasonable for some of those businesses.

And to wrap up, we would be remiss if we didn't talk about something that I know you really love.

Even in the dog days of summer, there are still times for dollar-cost averaging.

That's right. I want to come back to it because again, for those of you who've been listening for a long time, if you go back to last spring and summer, that's where we were really highlighting, as markets started to turn, that opportunity to dollar-cost averaging. So if you started a twelve month dollar-cost averaging program back last spring and summer, you're done now. You've got your money in the market, and you've experienced this lift off that we've had this year. You were buying at lower levels of the market last summer. Even right now, though, if you started this spring, you've been buying as the market's been going higher, but you have participated with at least part of your portfolio in this move at a time when, if we go back to March and April, the risk reward, basically the upside potential was less than the downside risk. So you were able to get some money in, participate in this rally that we've seen. You don't have your whole portfolio in if you started this past spring, but you were able to participate a bit. Now, again, as we sit here, and you start to look at the mix, is there more upside or downside over the next 12 to 18 months? Dollar-cost averaging allows you to not have to worry about making that pick. If things go down, you just buy more for less. I should have let you go through the whole thing because you articulate the advantages of dollar-cost averaging far better than I do. But it's a good thing.

Yeah. I think as investor, we got to ask ourselves, are we long-term optimists or are we long-term pessimists? That's number one on Choose Your Own Adventure. And if you choose long-term optimist, then you're saying, well, what tools do I have in front of me? And it would be nice to sit there and say, well, the stock market got to some level where you could just buy it with both hands. But that doesn't really happen that often. So dollar-cost averaging is a great tool for the long-term optimist to get to their plan. And we've seen it here. I think it will continue to be a great tool to get to that long-term optimism that we talk about a lot.

And if you just look in general, who builds wealth more effectively? People who are optimists and who take some risk and put money to work to get that money working for them. Historically, that's always been the rule. As bad as things might seem at any particular point in time, over the long haul, they're always getting better. And you lose sight of that if you're having a particularly bad day here and there. Overall, think of where we are today versus when I was a kid; it's a much better world today than it's ever been.

That was a long time ago, Dave.

It was a long time ago. And by the way, your little golf cart story, that's just another example of how hardworking you are. Because if you walk the course, it will take you an extra hour to play. You drove the course and so you got back to work an hour earlier.

That's right, Dave.

Always the analytical mind at work, every single moment of everyday.

Well, you can play golf and listen to a podcast, you know.

I know this, and I suggest this one. All right, Stu. We'll catch up with you next week. Thanks as always.

Thanks, Dave.