Transcript
Hello and welcome to The Download. I'm your host, Dave Richardson. It is always exciting when we get our good friend, Sarah Riopelle, on to spend some time with us. Sarah, welcome.
Hello. It's been a while since I was here.
It has, and I don't know why. I always say that, but you're a very busy person.
Lots going on all the time, so hard to find time for some of this stuff sometimes.
Yeah, but we got you on video today, so this may be the first time many of you have seen Sarah. And I'm predicting that we're going to have a cult following for your future appearances.
You're setting a very high bar there, but that's okay. We'll see how it goes.
Everyone's dressed up today. Are you at home or in the office?
I'm in the office. I'm always in the office.
That's right. And I'm never in the office. I'm in Edmonton today. My first taste of minus five-degree temperatures today.
It's quite cool here in Toronto today as well. We're getting geared up for the festivities that is Taylor Swift over the next few days.
Oh, are you going?
I'm not going. I'm just trying to do my best to avoid the chaos if I can, but I'm in the city.
Your daughter didn't want to go?
She's going tomorrow night. She's on her way home from school right now. She's got tickets for tomorrow night.
I'm one of the fortunate parents. I've got two daughters, and they're not huge Taylor Swift fans. They've got no interest in going. So financially, that might be the most important gain that I've had this year. But you've had all kinds of gains because people who have invested over the last year instead of saved — and we'll get into that distinction — have done really well. Even a very conservative investor in a portfolio that has some bonds and stocks, or a conservative or balanced investor has done really well over the last year. And if they're investing with you, they've done particularly well.
Yeah, that's true. I know that the gap between somebody who’s, as you said, saving or keeping their money on the sidelines and not on the market, they've earned something like 5%, perhaps, over the last 12 months. And if you compare that to one of our balanced portfolios, which has earned 22%, or one of our more conservative portfolios, which has earned 14 to 17%, or even one of our all-complete government bond portfolio, which has earned 11%. The gap between being invested in the market versus sitting on the sidelines and sitting in cash is pretty significant for investors.
Yeah. And so as always, and what we try to talk about here on the podcast is what do we think about going forward? And that's what we're going to cover off today. But I think the one thing, the one message, this is another year that really teaches you the lesson of focusing on the long term. As good as the last year has been, I don't think anyone expected it to be this good, but you had to be there to get it, right?
Absolutely. We're always going to see short-term volatility in markets, and people use that as a reason to become nervous or to move to the sidelines. But the majority of the people who are investing in markets are not investing for the next one month or three months or six months. They usually have 5-, 10-, 15-year time horizons, and they need to focus on those long-term time horizons and stay invested in the market because that's how they're going to get the returns, as opposed to try to move in and out of the markets when they deem the time to be right. I don't believe that people who are trying to short-term time the markets are going to be successful, and it's going to impact their ability to generate the returns that they need to get those savings and position them well for retirement or whatever they're saving for.
Yeah. We've talked a lot about this over the last several years as you've made your appearances — and some other PMs have been on to talk us through — it's been an unusual period. Obviously, it's the trauma of COVID and the big inflation, a really terrible year in the bond market. But when you look back over a five-year period, staying invested, if you just forgot about everything else that was going on, or maybe even focus, taking care of all the disruption that was going on and not worry about investments, you would have done just fine. And I think that's the point, because over the long term, you can get something completely unexpected, like a COVID that happens tomorrow, and there's no way you can anticipate that, but then the longer term tends to factor in some of those bad events along with some really good events, and you average all out, and it works out quite well.
Yeah. There's a chart that I use of one of our largest balanced portfolios that just does the entire history of it over the last 35 years or so. We can point out the global financial crisis, we can point out the selloff from COVID, we can point out that 2022 bear market in bonds. But they're just small little blips on the chart. When you stretch it out to that 35-year period, yes, they feel significant when you're going through them, but when you look at it from a longer-term perspective, they're actually not that significant period. Ultimately, the performance of that portfolio is strong and up and into the right, as we like to say, because it's performed well over the long term. But the only way to actually get that return in your own portfolios or your own accounts is to stay invested and experience that over time as opposed to sitting and watching it happen to somebody else.
And then have the discipline as things move down. And this is what we talk about, regular investing, to regularly invest. That's really going to help you. I have another chart to show. I'm touring right now, going across Canada, Coast to Coast, doing presentations for investors. The chart that we've got in the package around the election — and I'm sure we'll talk a little bit about the election as we move into some of the comments you wanted to share with the listeners —I've got a chart from Nixon to today around different presidential campaigns. And $10,000 invested in the S&P 500 after the '72 election of Richard Nixon is now worth about $550,000. After the stock market crash of '87; you went through all the different periods. But again, just over time, economies grow, we get more innovative, we get more productive. Companies can make more money in those bigger economies and on it goes. And it's never guaranteed that it's going to continue, but there's nothing around the corner that's suggesting it can't.
Yeah, exactly. And even if you say there's no guarantee it's going to continue, there might be short-term selloffs or economic slowdowns. But over the long term, don't underestimate the power of humanity to innovate and move forward.
Yeah. I drive a car from the airport here in Edmonton to my hotel. A hundred years ago, I might have taken a horse and buggy, and I would have had to stop along the way. A hundred years from now, I bet I'm not going to be taking a horse and buggy. I'm not going to be in a car. I'll have my own little personal jet that’d be flown by some robot or artificial intelligence. We go forward. This is the point. And that's why optimism is generally the view of the world you want to have. There's lots of things to be negative about in near term. Humanity is not perfect, but over time… There's our preachy long-term speech for why you invest versus just save. Save for a rainy day, a little bit, but invest for the long term.
Yeah, I totally agree. So, what do you want to talk about?
Well, let's talk more about bonds because in the portfolio, you've been more active around fixed income. I know you're very active, just around the election alone, but even leading into the election, a lot of movement in bond yields. And we've seen the Fed with their first rate cut, and we've talked about all the implications of that. They've now subsequently come in with a second rate cut. How has this affected your outlook? I think that the 10-year treasury, after the September employment report in the US got down to about 3.65 and is now sitting, as we speak here this morning, somewhere around 4.40, 4.42. So that's a big move.
Exactly. The global economy has held up reasonably well. We believe that a soft landing, which means that the economy can slow but will not enter a recession, is probably still the likely outcome. And that's especially true now that many central banks globally have begun delivering interest rate relief, as you just mentioned. In the US, the economic data has been fairly strong over the last couple of months, and that's helped to change expectations for the amount of rate cuts that the market actually thinks might happen. And that's what's prompting the movement in yields over the last couple of months. So markets are now calling for about 75 basis points in further cuts over the next 12 months. That's significantly lower than what they had in early September. At that time they were looking for 200 basis points of cuts. So they really brought that back in with the strength in the economy that would be seen. It's basically taking about 100 basis points of those cuts out of the forecast over the next 12 months. The second factor for being pushing bond yields higher is the outcome of the US election. So the tariff's being proposed by President-elect Trump and the Republican Party could cause inflation to rise over the coming 12 months. That's going to limit the amount of easing that the Fed could possibly deliver. And so that's something that's starting to be factored in as well. So since mid-September, as you mentioned, to be precise, we hit about 3.61. We're up about 80 basis points since then to around 4.40, as you said, at the moment. We now think the bond yields are above our modeled level of fair value, meaning that bond markets are reasonably valued at these levels. We believe that the valuation risk is minimal. The return potential has improved. And the bonds are, once again, in a good position to act as a ballast against equity market volatility in a balanced portfolio.
Yeah, and that was one of the interesting things. Even as the stock market has been very strong throughout 2024, if you look over the last six months, volatility and the index that measures volatility actually moved up significantly. Now it is tapered off in the last week, right around just after the election, but it started to come back again. And one of the big uncertainties that was out there was the election. What was the result going to be? You wipe that out. But now the uncertainty is, okay, well, now what is he going to do? And so now there's the uncertainty of that, which creates lots of questions. And as you say, depending on the way these tariffs are imposed, if they're imposed, and how broad they are, it could have a significant effect on inflation and where interest rates can go.
Yeah, I think you make a good point. We had the uncertainty of how the election was going to go, and now we replace that with the uncertainty of what that means for the economy. I think the key theme there is that there is always uncertainty in markets and in the economy. And trying to predict how that's going to resolve itself and trying to trade the markets, believing you can see into the future and figure out how that's going to happen or what's going to happen with all that stuff, I just think is extremely difficult. And so for us, it's about staying fully invested but looking for opportunities to trade around the edges where we see them, as opposed to taking big, giant moves into and out of markets, because we just don't believe that we have the ability to look into the future and know with 100% certainty how these things are going to resolve themselves. And so we make small, measured moves where we think that we see opportunities to add value as opposed to big transitions into and out of markets.
Yeah. I did like your precision point there, where you jumped in with the actual rate, what the lowest rate was. Your 3.61 versus my 3.65. I don't touch anyone's money. I know the listeners are probably just shocked by that. I'm so brilliant. But I'm not. That's good. You touch people's money because you're precise. This is the thing. It's why my mother is a great baker, and I'm not. Because my mother is precise, and baking requires precision, and that's not me. Just like managing money requires precision, which is not me, that's you. And so people should be very happy at that. And as you suggest, you have been tweaking some things around the edges. So what have you been doing? Talk about that, and how is that setting things up for what we anticipate we're going into with this new presidency?
Yeah. So as you said, we've been a lot more active on the bond side of the portfolios. So the change in yields over the last few months due to that change in expectations around interest rate cuts has provided us with the opportunity to make several tactical adjustments in the portfolios. So in late August, we reduced our fixed-income exposure by 100 basis points. So we went underweight fixed income, and we moved the proceeds of that trade to cash instead. For two reasons. One, we wanted that cash to act as a buffer against market volatility that we thought could happen leading into the election. And also, it gave us the flexibility to take advantage of opportunities should they present themselves. So sitting on a little bit more cash gives us some opportunity to deploy that cash back into bonds or into the equity market as the opportunity presented themselves. In September, the economic data was fairly strong. Government bonds sold off, meaning that yields rose as the market adjusted to that changing view on interest rate. So at the end of October, yields had gotten up to about 4.20. So we sold at around the 3.70 level. Yields had gone up to about 4.20. So we put half that trade back in. So we had taken 100 basis point out. We put 50 basis point back into bonds at around the 4.20 level. And then leading into the US election, we saw yields were moving higher again. As you said, we got up to that 4.40 level so we decided to put the second half back in. So we moved with another 50 basis points and got ourselves back up to neutral. I think the important point here, though, is that that trade that we did last week, we did it around 12:30 AM on election day. The reason that's important is because I wanted to demonstrate with you this always-on approach within the portfolios. We don't have to just trade during market hours. We do have the ability to trade using derivatives. In this case, we've used futures in the bond market to actually put that bond weight back in, and that we are looking for every basis point. We were joking about the difference between my 3.61 and your 3.65 earlier. We're looking for every basis point of performance that we can generate on behalf of our clients. We were watching bond yield very closely. When they got up to close to our target of what we were looking for, about 12:30 in the morning on the day of the election, we pulled the trigger and bought those bonds back and got the portfolios up. And so it really demonstrates the fact that we're always monitoring everything, that we have this always-on approach. We can trade the portfolios at all hours of the day using the various levers that we have available to us. And we're taking advantage of all of the opportunities that are available to us.
Yeah, for people who have listened to this podcast over the four years that we've been doing it, there's some pretty consistent themes. We've covered a lot of them today. Invest for the long term, invest regularly, use dollar cost averaging, make sure you understand the risk level you want to have in your portfolio and understand risk. If that's not something you want to do every day of your life, then hire a really good portfolio manager to do those things because they're there 24/7 around the clock, all around the world, every single day of the year, making those adjustments for you. And that's a great example of it right there. To be honest with you, I was asleep then, and you're up and your team is up making changes. And we talk about a half % of the exposure. You're still talking a couple of billion dollars. So this is not a small change. It seems small, but still in magnitude, it’s a big change.
Exactly. I mentioned earlier about, we call it scratching at the inches, is that we're looking for every basis point of performance that we can. So you might think a half a basis point movement back into the bond market doesn't seem that significant, but every basis point counts. And small, measured moves made consistently over time are going to help us to generate those strong returns for our clients.
Okay, well, let's finish off with the stock market and what we're seeing there. It's been an unbelievable run. And then post-election, we got another little bump up. And where do we go from here and how do we position the portfolios for that?
Yeah, well, US stocks have continued to climb to record levels. We hit another new all-time high last week. Or is it this week? What day is it? I don't even remember. We hit 6,000 on the S&P 500, that is the fiftieth new all-time high so far in 2024, which is pretty impressive. So equity market gains earlier in the year have been highly concentrated in those US mega cap technology stocks. We call them the Mag7. In the last few months, actually, some other markets have participated in the rally, and so that's actually really good to broaden out the participation beyond just those technology stocks in the US. From a valuation standpoint, our composite of major equity is showing markets to be about 5% above fair value, with the US market being the most expensive market by far because of the performance of those technology stocks in the US. If you actually exclude the US market, those global stocks are actually below fair value. They're 5% above in aggregate. You take the US out of that, they're actually about 15% below fair value. What I'm saying is we're seeing good value in equities in other areas of the world outside of the large-cap US equity market. That being said, there are some signs that investors are becoming too optimistic about the prospect for equities. Investor optimism or investor sentiment has become quite extreme on the optimistic side. That can tend to be a sign for caution. So valuations being a little bit higher than we would be comfortable with and extreme optimism in the market has us just being patient about our prospects for adding to equities at this point. So we are sitting on a neutral equity allocation, waiting for an opportunity to potentially add to equities at better levels from here. There's a term in the market that we call price to perfection. And what we're worried about there is that there's just way too much optimism priced into the equity markets right now, and we want to just wait and see how that results itself. We are by no means bearish on equities. I wanted to be clear on that. We're not underweight equity. We're neutral equities, looking for opportunities to potentially add to equities. I don't want to give the impression that we have big concerns about the equity market. We just think that we could potentially add at better valuations or better prices in the future. After these most recent tactical adjustments, we're sitting on neutral in the asset mix. So neutral bonds, neutral cash, and neutral equities, which I realize is not very exciting, but it does position us well to take advantage of opportunities if they do present themselves. We do have some bets on the regional level. We might be neutral at the top asset mix level, but looking at our equity regions, we do have some preference for non-North American equities over US and Canadian equities because we see better value in those markets.
We talked about optimism long term as a good mindset for investors. You want to be an optimist long term. Again, the whole bet on the human race, it's always a winner. But in the short term, when optimism rises to unrealistic levels, that's when it becomes a concern. Something can happen in the near term that, again, is not the perfection that we're looking for, and that can create a bit of a pullback in things. And that's why you've got that neutral position. And we talk a lot with Stu when we have Stu's days. We talk about dollar cost averaging a lot when you're in a position like this in the market as you're putting new money to work in in the market.
An asset mix is all about balancing the short term versus the long term. So yes, we absolutely believe in the equity risk premium, meaning that over the long term, we believe that stocks will beat bonds, and over the long term, we will be positioned to take advantage of that. However, in the short term, we have to balance that long-term view against short-term potential concerns in the market that we could have a selloff here because we have too much of optimism priced into the markets. But we want to be positioned to take advantage of that opportunity if the market does sell off to add to equities, as opposed to take that as a sign of being concerned about equities. And so it's about balancing the short-term view versus the long-term view.
And then that whole idea about the broader exposure, not the concentrated North American exposure. You have a set of portfolios that you manage that have a higher concentration in Canada and another one that's more broadly diversified outside of Canada. And it's very interesting when you look. So the last three to five years, the impact of the US and the carry-over into Canada and what's happening in energy markets, etc., has led that Canadian portfolio to outperform a little bit. But if you just look at this year, it's reversed around and you're starting to see the more broadly diversified portfolio do better on a relative basis. And that's what you would expect longer term.
Yeah, absolutely. I really believe, as we talked about many times before, in having a globally diversified portfolio and not having too much concentration in any particular asset class, equity region or country. And so over the long term, I believe that's going to benefit clients. And you're starting to see that in those globally focused portfolios that you mentioned.
Yeah. As I travel across this country, it is the best country in the world. I have an immense bias towards Canada. All of us as Canadians, we love our country because it is an amazing place, but tiny in the world of investing. And there's lots of opportunities out there, and you got to take advantage of them.
When you think about the world of investing, we as Canadians have so much ties in the Canadian market and the Canadian economy with other parts of our lives, our jobs, our pension plans, our mortgages. You can take a more diversified approach from an investing perspective without being seen as abandoning your home country bias.
That's right. And really great to be in Canada right now because Taylor Swift is here. I mean, everybody wants to be in Canada right now with her here.
Yeah. I'm not looking forward to my attempt to get home and out of the city tomorrow. And while all those concert goers are coming into town, I'm going to be trying to get out of town. So I'll let you know how that goes.
Yeah, but I mean, pretty amazing, though. We got warnings sent out to us about coming into the office and just the whole traffic snarl that you're expecting around one person coming into town. And then the economic impact of it. Again, if you have any doubts about the potential that the global economy has over the long haul, you just look at what one person can do and the impact it has on the economy. It's amazing.
Yeah, I totally agree. Should be fun.
Should be fun. I'm glad I'm not going to be there, but you are in the middle of it as you're in the middle of everything. Sarah, thanks always for taking the time to be with us. We ran a little bit long today, but you had a lot of great stuff, so I'm glad we did. And thanks again.
Thanks so much.