AGF Management Limited (AGFB) Earnings Call Transcript & Summary

All right. Good morning, everyone. Welcome to the June Edition of our Market Update Webcast. Joining me is John Christofilos, AGF's Chief Trading Officer; and Mike Archibald, AGF Portfolio Manager; and I'm David Pete, your moderator for today. Before we begin, I need to cover off a few administrative items related to our virtual event platform as always. Today's presentation will last no longer than 60 minutes. Those joining us live can submit questions any time during the presentation by opening the Q&A icon found along the side of the presentation screen today. Questions will be addressed near the end of the webcast. Additional resource for this session can be accessed in your attendee hub at the top of the page under the Resources tab. And finally, please note, CE Credits may be available for members of our Canadian audience. Okay, guys. So we've got lots to talk about. But let's first start with getting some U.S. Federal Reserve predictions from both of you. The Fed will announce this latest rate decision later today at 2:00 p.m. And while markets expect the Fed to pause, the bigger questions in my mind at least, are how long the Central Bank will remain on hold? And then what direction do rates head once it decides to make its next move. So John, maybe we'll start with you with just your prediction on what they might do today and then we'll get into a little bit what they might say and then communicate after the fact.

Sure. Sure. Thanks, David, and good morning, everybody. Look, I think the market has telegraphed quite well, and this Fed typically doesn't like to surprise the market. So we're expecting a pause or a skip as many are calling it today, David. So if there's anything other than that, then the market is going to go for a bit of a loop one way or the other, but we're not expecting that because Powell has never tried to surprise the market. And if you listen to Greg Valliere enough our Chief Washington correspondent, he talks a lot about many people in the press having a look at what's going to happen, and we've already seen that. So the market is positioned for a skip, the press is talking about a skip, so my expectation is it will be a skip. More importantly than that, it's really the 2:30 press conference that matters. It's what he says and how he says it, that will matter to the markets more than this anticipated skip at this point in time. So keep a close eye on 2:30 and later because that will be the true test of where the market things are going to -- things will eventually end. My personal opinion is, and this is my own opinion, I think we're done with raises. I think the Fed will pause and continue to pause. And if you're looking for the next move, it will be a cut of some sort. It may not be until 2024, but from what I see and hear and talk to people about from a training perspective, again, and it's coming from many of the trading desks around the world, I think we're either done or really, really close to being done. So that would be my expectation. Skip today or pause? And then the next move would be a cut at some point later this year or early into 2024. That's not consensus, by the way, that's a John view, but that's the way I see things at this point.

So let's get the Mike view now, Mike. What's your thought on, again, what they'll probably do today? And then just a thought about is this a temporary pause? Or is it more longer lasting? And then what ends up happening after the pause?

Sure. Thanks, David, for having me, and welcome everybody to the call today. It's good to be here. I tend to agree with most of what John said there. So certainly, markets are pricing, have paused today. The Fed usually doesn't surprise the largest Central Bank despite some of the other large central banks, including the Bank of Canada having surprised recently. There's been an enormous amount of tightening that's occurred here in the last 12. The easy heavy lifting, I think, on getting inflation from kind of 9% down to something more reasonable where we are now has kind of been done. I think you're going to see rates stay at a relatively elevated level for the foreseeable future. Consumers and businesses are going to have to continue to adjust to the likelihood of rates being higher. So one more hike I think or no more hikes, I mean, at the end of the day, I think John and I are largely singing from the same song sheet here. We're at the very tail end of the hiking cycle that ought to be good for the economy, for the consumer and hopefully for the stock market moving forward.

Okay. Great. And maybe we can just dive in a little bit about what it might communicate beyond the actual detail. So obviously, it's focus on inflation, the unemployment rate, we're going to hear a little bit about that and this idea of recession potentially. Did the inflation print earlier this week? Will that influence kind of what they end up doing, maybe not for this announcement today, but in July and going forward? Mike, maybe I'll start with you.

Sure. Yes. The communication is always where you get the volatility in the marketplace. And I think you've hit the nail on the head, David. They're going to talk about a few things. The inflation numbers that we got the last couple of days have been very constructive for the pause and to John's thinking possibly no more hikes. CPI yesterday and PPI this morning were both beats to the downside, which is quite good. I think he's going to continue to talk about this potential for a soft landing. And talk a little bit about the economy as we go through the call today. But our consumers still tend -- is looking very, very healthy. Businesses have been able to adjust to higher rates and pass through some of those costs on to the consumer, who still seems to be fairly flush with cash. So I think there's obviously a lot of parsing of every single word that he says in the statement and in the press conference. I would just highlight to those that are watching today, the reaction function of the stock market has tended to be negative over the last 5 or 6 press conferences that Powell has been out there. So 5 of the last 6, the stock market rallies after you start stocking, and then tends to follow the path a little bit lower as you get through the final press conference. So he's going to stick to, in my opinion, a bit of a hawkish tone here. He doesn't want to let the stock market kind of run away here. They've done a good job of getting the first part of inflation under control. I think there's still some work to be done there. So I think he pauses today and he's going to probably talk just about how resilient the economy is and the possibility for further hikes. I think that's a smart move. You get another 4 to 5 weeks here to look at the data and see if it confirms what we've seen in the last couple of weeks.

Mike, before I get to you, John, sorry, can I just ask you, Mike, about that market reaction? Why do you think that is that there's this it has reacted the way it has in the past few?

Sure. I mean, listen, Powell hasn't always been, I guess, super transparent with a lot of his communication. And sometimes you come out and you read the statement and it appears to be dovish, and then he comes out and he maybe starts dovish, and he starts talking hawkish, and the clarity of the message hasn't always been perfectly in sync with, I think, what market participants are thinking. And to be perfectly fair, some of this is obviously related to positioning data as well, which John and I talk about quite often. So the market has done well in the last little while here, and so you tend to have people coming in and putting on aggressive positions into the Fed thinking that they might say they're finally done raising rates. And then he comes out and starts talking a little bit more hawkishly and obviously, some of those people are caught on the wrong side and so things have to unwind. So lots of minutia in everything that we're analyzing here, but I do think, like I said, the trend for the last little while has been to sell it off after we finish speaking or start speaking.

Yes. And David, just to touch on -- Mike hit it right on the head. And just keep this in mind, right, when there's any sort of ambiguity or lack of clarity in Powell, there's enough what we call machines in the market or algorithmic trading that goes on, that really does have no idea what he's saying. So it's going to overreact one way or the other. Typically, they overreact to the downside because there's not enough clarity in his commentary. So it's probably a little bit to do with that as well. If he was clear, then I think the market would be able to absorb it when he's unclear and he's flip flopping a little bit, machines tend to default to the downside, and you get a bit of selling. So we'll watch for that again today. And then on the question on inflation. Look, we've had 11 consecutive months of lower CPI, okay. So we were up at that 9.1%. We're now down to 4-ish, call it. And Kevin has talked about it and we all have on this call over the several months that the absolute value means less than the direction that we're moving in [ Audio gap ]

[ Audio gap ] can you too see just how is the market going to continue to handle higher rates? So there's still one more hike priced in here for July. Still not sure if that's what's going to happen here. But I think what's going to end up happening here is you're going to see a pause today. We'll see how the market digests that. We've had a nice run here over the last several weeks. I'd also suggest that on a go-forward basis, there's probably a pretty good likelihood [ Audio gap ]

[ Audio gap ] which is the right direction to be going in?

Well, our focus on this 2% number, right? We got to get to 2% CPI. The Fed will talk about it today. They will stick to the 2% that I talked to. It's just a number, right? Keep this in mind. Prior to this inflation bump, we were sub 2 forever and nobody seemed to really worry about sub 2 because we were sub-2. So now that if we get to 3.5 or 4 or even 3 from my perspective, that's not a bad number to be at. And markets performed historically quite well when we have 3, 3.5 or even 4% inflation as long as it's tame and it's not moving around a lot. So just let's focus on 2% and focus on the direction and the direction today is the right way. It's going the right way, 11 consecutive months of lower CPI.

The next sort of element to these communications. It seems to me that maybe the best thing for investors to do in and I just kind of ignore that as where it's -- it's just -- it will be over in the next day and you can kind of move on from, does that make sense?

Yes, it does. It's called whipsaw. If you try to fight to tape or fight the machine, the machine is going to win, right? And you'll get whipsawed back and forth. So we tend to want to take that noise and eliminate it. Let the market settle back. It's no different day than people always ask me, when should I trade and when shouldn't I trade? Well, there's 3 great times where you want to try to stay away from, right? 9:30 to 9:45 in the morning because there's lots of noise in Ajuda, the market and hasn't settled in right, 12 to 1 because it's lunch time and traders go have lunch and spreads widen out. And then 3:55 to 4:00, where there's lots of cleanup noise. So no different here. This will be noise in the market. You want to try to stay away from the noise, what he said and how we set it and then we'll make determinations on the portfolio side of things. But trying to fight the tape or fight the machines, it's a loosing battle for sure.

Okay. Mike, you talked a little bit earlier about this idea of a soft landing or no landing or hard landing. Curious to know how you guys both think about this idea of a potential recession at this stage, we've been talking about it, it seems like for months, on months and it still isn't kind of here. So what's your thought on that, Mike, and then maybe to go to you, John, after that.

Yes. So I think John and I have been in the same camp on this for a while, and I'll tell you why I've been in this camp. Its recession is clearly on the mind of everyone. Media is talking a lot about it. Obviously, there's been a slowdown in economic data. So it seems a logical thing to talk about. The strength of the consumer, I think, is really the key here. I put a very low probability on there being a recession in 2023. As you said, pretty much every month, people keep saying it's coming next month, its coming next quarter, and they've been saying that for 9 months, and we're still in a pretty good environment here. So I think what you got to remember is 2 things. Number one, we have a huge amount of excess savings built up for the consumer throughout COVID. That is continuing to sustain economic growth in both Canada and the U.S., and I think it's going to continue to do so going forward. And just as we saw with stimulus in 2020 and 2021, it takes a long time for that to show up in inflation. It took 18 to 20 months for it to come out and start to see a big uptick in the inflationary numbers. And similarly, on the tightening side, were -- I'll call it, 12 to 15 months in depending on which central bank you're talking about in terms of raising interest rates. And that's still going to take some time to feed itself through to the economy. So as far as I can see, there's no real high probability in my opinion, of recession in 2023. On the stock market, I think, is a good indicator, right? It looks out 3 months. It can do a pretty good job of predicting kind of where the economy is. And at the moment, stock market is still making 52-week highs in the U.S. So I take that as a good sign. I'll give you one more thing that I'm paying attention to, and I'll call it the 2 Is and 2 Es, okay? So if you look at inflation and interest rates, John talked about inflation, it's gone down 11 months in a row. It's moving in the right direction. We kind of already talked about interest rates whether we're at the peak or we're one hike away or whatever the case may be, we're pretty close to the end of that. Those are both very good things for the market over time. The multiple that you're willing to pay for earnings should go up in that environment. The 2 Es are a little bit more difficult, but that's earnings and employment. The employment data continues to be extremely strong. We aren't seeing any real let up in the U.S. at the moment, claims have gone up modestly, but not a lot. So the environment still is quite conducive to the consumer being in a healthy position. And then lastly is earnings. And this is the big wild card here. So the earnings curve has come down quite a bit in both Canada and the U.S. with the expectation that the economy was going to soften earlier this year. Obviously, that hasn't happened. You haven't seen the collapse in earnings and earnings look like they're kind of bottoming here. And if that's the case, and they start to turn up and you get a rebound in 2024, which is what the market is predicting. That is also a very good tailwind for stock. So I'm not suggesting that there can't be a recession at some point in time next year. But from the lens where I sit and all the things that are working in the market right now, I just don't see it happening in 2023.

John, it's your turn.

Yes, I'd love to disagree with Mike as I make for better television. But I tend to agree with them. I mean, I don't see anything on the horizon that's going to get us into a recession in 2023 unless there's a -- and let's God forbid, there's any sort of disaster somewhere around the world or a black swan event, which you can never predict I don't see anything on the icon that shows us that we're getting -- we're going to have back-to-back negative GDP quarters in the second half of the year. So that doesn't mean it's not going to happen in 2024, but I will come back to the fact that recessions do occur, right? And they have historically, and they're not black swan events. They do happen from time to time. So if not happening in '23, may happen in '24. And if it does, then we'll have to manage our portfolios accordingly, but it's not something that we haven't seen before, and we'll be able to react quite well in that environment. Whether it's a hard landing or a soft landing, I'm keeping an eye on one thing and one thing only. Mike, you talked about a bunch of stuff, but the employment numbers, right? As long as people are employed, they will continue to spend money. That's just human nature. That's what we do. We like to buy things. So as long as you have a job, you'll be able to earn some money. And right now, the numbers are good. They're not great, but they're good and people are employed, and there's still jobs available for those who want to go out and try to find a job. If that deteriorates, then we may have an issue. But at this point in time, we don't see that happening anytime soon. So keep an eye on employment, it's very, very much a big key into whether we go into a recession or not. And then the level of employment will be whether we go into a hard landing or a soft landing.

Yes. And I think just to add on to that, John, a few things that you want to pay attention to are just what is happening in the stock market, right? What's working and what's not working. And as you're approaching a recession, you tend to see very defensive parts of the market start to outperform. So I think things like consumer staples or utilities or telecom stocks. And quite candidly, that's just not happening right now. Those sectors are massively underperforming the broader marketplace. And so it doesn't jive in my mind with this pending problem that the economy is going to start to roll over. So we watch these things, obviously, on a day-to-day basis. And right now, the indicators that we pay attention to just aren't suggesting that recessions on the near-term horizon.

Okay. Great stuff, guys. Mike, just so everybody is clear, you're obviously -- your focus is Canadian equities. John had alluded the idea that it's very unlikely that the Fed is going to surprise markets later today. But that's exactly what the Bank of Canada did last week when it raised rates by 25 basis points. Mike, I'm just curious, given your background and your expertise, what was behind the BOC's decision in particular for you? And then what impact is it having on Canada's equity market so far?

Yes. Good question, David. So the Bank of Canada tends to have this reputation as being a bit of a maverick and we'll kind of go off script on occasion with respect to monetary policy. So clearly, it was a surprise to the day before that the Australian Central Bank surprised to the upside as well. I think to be perfectly honest with you, 2 real main drivers of this. We've seen a fairly significant uptick in housing activity in Canada. And I think that got the bank a little bit concerned. Obviously, they've done a good job of the same thing in the U.S. is getting inflation a little bit better under control here of late. But we've seen an uptick in housing. We've seen a little bit of an uptick in some of the consumer spending data. And so I think they were a bit concerned that, that might be putting a dent in kind of the inflation cooling story that they've sort of able to achieve here. So I think the market had priced in that they were going to pause and then hike in the summer, and they clearly surprised to the upside. Now they've gotten a little bit more hawkish, I think, and I think there's another hike being priced in here for the summer. So the market reaction to that, I think, was a bit of a surprise. The Canadian dollar rallied fairly sharply and subsequently sort of rolled back over, I guess, afterwards, as I think market was expecting that maybe they're going to go one more time, but we are, like John said, with respect to U.S. policy getting pretty close to the end of the hiking cycle. And then with respect to sort of the market reaction. Certainly, the Fed movements drive market movements significantly more than does the Bank of Canada. But I would say there's a bit of a continuation in the Canadian market on some of the trends that we've kind of been witnessing all year. Your tighter policies leading to a bit of pressure on the Canadian banks. Obviously, there are some worries about the economic slowdown and what that's going to mean for the consumer lending books. Are there going to be write-offs from loans that have been made, so the banks as everyone will know, have been under a reasonable amount of pressure this year. And then also, you've seen a little pressure on some of the consumer discretionary names. Obviously, there's some concern about how strong is the consumer going to be able to withstand these rates and for how long are they going to be able to do that. So I don't think it's a huge issue sort of at the moment. But continues to be something that we continue to monitor fairly significantly. And as I said, policy is very tight right now. And so it's going to take a bit of time for that to filter through into the economy.

Hey David, just kind of touch on one thing Michael said that I think it's important. And again, this is more a Toronto, Montreal, Vancouver type comment. But to Mike's point, real estate has picked up quite significantly over the last couple of months here in Canada, especially in those main cities. We're now seeing multiple bids. We're seeing over asking sales and the like. So it's probably the reason to Mike's point, why the Bank of Canada did what they did. And I don't see that going away anytime soon. If we get some stable rates here for the next little while. The demand for homes in those 3 centers, especially is robust. We're going to see real estate continue to do well in those main cities. I can't talk about the rest of the country because some of the smaller cities and the like may not have the same sort of demand mechanisms. But in Toronto, Montreal, Vancouver, Calgary, even we're starting to see a bit of a pickup, and it's probably spooked to Bank of Canada a little bit to jumping 25 basis points last month. But that's probably what we want to keep the close eye on it. That doesn't get too hot, or Bank of Canada may do something yet again.

Okay. Great. We've got to go through one more segment here with you guys. Obviously, Central Bank policy continues to hold tremendous way with investors right now. But there's another market dynamic that I wanted to talk about that's at play these days. And that's the fact that market leadership has narrowed significantly with just a handful of stocks being responsible for the large majority of returns that have been realized year-to-date, at least on U.S. equity indices like the S&P 500. So I just wanted to get your sense as to why this is happening and then maybe get into a little bit about what investors need to consider when we're in a market like this that's narrowed so much. So John, maybe I can just start with you just a little bit about the why to this?

Investors are me-too creatures, David. And when you become a me-too creature, you do what everybody else is doing. And we've seen a lot of that in these 7 to 10 names that we're seeing in the U.S. and hearing about every single day that's not healthy for the market. Let's be clear, right? We want to see a broadening out of participation, but that won't happen until some of these me-too creatures start to talk about, okay, you know what, I've made enough money in those names. Now I'm going to redistribute that capital somewhere else. We're starting to see a little bit of that, and that's why I'm a little bit more optimistic. And so as my goal into year-end, we're starting to see some of that distribution now, especially in June, back into the small mid-cap names that we hadn't seen for many, many months, right? So as those creatures start to look elsewhere, that will help the market participate more robustly and give us a better return profile than we've seen in the last little while. The other thing I will tell you is there's a lot of cash, David, still sitting on the sidelines that at some point, will have formal fear of missing out, right? It hasn't occurred yet. We're starting to see a little bit of a glimpse of that, but there's a heck of a lot of money sitting on the sideline. And I'm sure many of our viewers and listeners today have clients that are asking that same question, when do I come back? When do I come back? And we will get a little bit of that into the second half of 2023. So those are the 2 things you want to see. The big 7 or big 10 or least 7 or whatever you want to call them, start to see some selling pressure and then the redistribution of that capital back into the market, and we're starting to slowly see a little bit of that over the next sort of while. And then the second thing would be this formal effect, if you're missing out when people say, okay, I can't sit on the sideline anymore. I need to get this money back in motion. So those 2 things I'm watching for very, very carefully.

And then, Mike, just kind of beyond that, sort of what John's talked about, more of that's almost the psychology of what's going on here. Is there something about the current market conditions that's making people want to buy those 7, 10 names. Is there something inherent in what they provide that gives investors some sort of comfort or?

Yes, absolutely. So a couple of things here. When the perception is that growth is slowing in the broader economy, you tend to move up cap and you buy large-cap stocks, and you tend to buy companies that are still exhibiting some level of growth. And the big 7, just to make sure everyone knows who were talking about that's Apple, Microsoft, Amazon, Nvidia, Google, Tesla and Meta, which is old Facebook, those 7 stocks all were under quite a bit of pressure last year. They did a great job to cut costs, and they've kind of returned to a better profitability outlook. And so when you're uncertain about what's going to happen in the broader marketplace with respect to growth, you tend to gravitate towards these types of stocks. Just to make sure everybody understands what we mean by narrowness, you've got 11 sectors in the broader marketplace. Generally, you'll have 3 or 4 or 5 of those sectors outperforming the market, you'll have 3 or 4 or 5 of those sectors, underperforming the market, and that's what we would call a relatively healthy tape. This year, you have, as we said, as John mentioned, you have 7 stocks that are making up more than 95% of the overall S&P 500 returns and that is extremely rare. So another way to look at this is kind of what we pay attention to is what's also called an equally weighted index. So as opposed to a cap-weighted index, which is what the S&P 500 is, which is Apple is the biggest company in the world, so it has the biggest weight. The equally weighted index would look at every stock in the S&P 500 and give them the same weight. So Apple would have the same weight as the smallest company in the S&P 500. Well, why would you want to do that? It gives you a return of the marketplace are. And when you take a look at the returns year-to-date using the cap-weighted index, which is up about 13% to a couple of days ago, and then you look at the equally weighted index, which is only up 3%, you have a 10% disparity in overall returns, and that is significant. That is telling you that there's a very narrow participation, as John mentioned. And so the challenge with that is it's difficult for active managers to be really overweight all of the largest companies, okay? Those tend to be more mature businesses. They have reasonably good growth, but you can generally find other companies that are starting to have a little bit better growth prospects that might be a little bit smaller. And when those things aren't working and it's just confined to a very narrow group of stocks, it's a difficult environment to be operating in. So I think there's -- like I said, everybody, ourselves included, are looking for a little bit more of a broadening of the market to give us a sense that things are a little bit more healthy. And I think, as John alluded to, in the last, let's call it, 2 weeks or so, maybe as we flip the calendar into June, we have started to see that. So that's very healthy. Some of the money should start to come out of the Nvidia's and Meta's and Tesla's, which are all up more than 100% on a year-to-date basis. And they'll start to move back into other things where I think you can see some better returns going forward. So it's a fairly abnormal occurrence for it to happen as significantly as it has this year. We continue to watch it quite carefully. And as John said, you probably see some of those names soften up a little bit here and that money will rotate elsewhere.

David, just 2 quick stats for audience. I think it really pertinent. Nvidia now is a $1 trillion market cap company. Great company, but a $1 trillion market cap company, number 1. Number 2, Tesla, and I talked about this on our morning call this morning. In the last 12 days, they've been up 12 days in a row. They have added $293 billion of market cap in 12 trading days. That's the equivalent market cap of Merck, which is a huge U.S. drug company. That's not normal. At some point, respected portfolio managers and traders and investors will start to take money out of those names. They cannot continue that trajectory. It's just not possible for that to happen. So that will be redistributed out. That will be healthy for the market. We'll get better participation, and we'll get a better feel for what the market will do going forward than we have when only 7 or 8 or 9 names are participating in that upside market. So a lot of people think that it's a negative. I actually don't mind that concentration because ultimately, that concentration will end and people will redistribute that money into other sectors and other stocks and propel the market higher, I think, over the next 3 to 6, 9 months even.

I'm guessing that the heightened attention around AI is probably contributing to this a little bit in terms of some of the names. And that doesn't necessarily need a comment, just a thought from me. But I did want -- you probably already answered this, but I did want to just hone in on this idea of when you get this narrow, what should invest that already that really tough to chase maybe at this point in time. But is there a little bit of a waiting game here? Or how do you approach something like this as an investor?

Yes. I think you -- the word patient is critical here, David. Just I mean, like 2 things that come to mind here. If you're in these names. You are obviously -- you've done very well. It's probably worthwhile taking a little bit of profit here on some of these names. And if you're not, I think you want to be depending on what your time horizon is if you're a trader, that's a different story. But if you're investing for long-term returns, I think you want to be patient and not chase here. I think the big message that a lot of folks are receiving this year is with a narrow market, you really see the benefits of a diversified portfolio and having exposure to all sectors. It's really information technology and communication services that are driving all the returns this year. So having exposure in a diversified portfolio to some of those stocks, I think would help, maybe you're not up as much as the S&P 500, but you certainly -- you do have exposure to them. So history generally says that the market will broaden out, and that's, I think, what John and I are both expecting going forward.

And the other thing that history tells us, David, is what led us here is not going to lead us further. So these names will be sold off a little bit. They will temper their enthusiasm and there'll be another sector or a group of names that will lead us higher. So from our perspective, as portfolio managers and asset managers, we're trying to find that next leg up, right? It won't be these names. Histories told us that many, many times over when you've got this sort of concentration that you want to look elsewhere for opportunities, whether that's Europe, emerging markets, Canada, different sectors and the like. So that's something -- that's something that we're looking at almost on a daily basis, I'm sure, from our portfolio managers.

Yes. And I would -- one other comment I would just make on that, it is exceedingly difficult to time the peaks on these things, okay? Like you could -- like to John's point, on Tesla, it's up 12 days in a row or whatever it happens to be. it's very overbought. You could have taken some off the table a week ago and you would have thought you were smart and then it's gone up for another 5 or 6 days here. So impossible to time these things, a lot of these charts just look like rocket ships are straight up in my experience in the business. There's going to be some event that is going to change the sentiment on this group who knows, maybe it's this afternoon, maybe it's tomorrow, maybe it's not for another couple of weeks or months, you don't know. You just have to have an approach and a discipline to what you're doing. And again, as I said, when you have these kind of returns in a very short window of time with companies that are so large, to me, it makes sense to harvest a little bit of profit.

Okay. Great. Maybe just one last question for me and we'll get to the questions. But it's about -- you guys are both obviously on the bullish side of things, hearing what you're talking about today. For those investors that are still sitting on the sidelines or maybe have a little extra cash. Given your viewpoint, how might they kind of think about getting some of that cash to work at this stage? Is there a method to it that you might -- they might consider from your perspective? Mike or John, whoever wants to go first?

I'll give you the simple answer and let Mike give you a more complete answer. I've always been a leg into a trade or leg into an investment, which means that if you have $100 to invest, you may want to start by putting $25 in, watch the market, react to your investment, and then make subsequent moves after that. Going all in or all out is not a great approach from my perspective, but legging in and watching the market react is probably the best approach. I've done it personally and my own investments over the years. I feel more comfortable that way than trying to go all in or come out all out at any point in time. But that's my own personal view on things.

Yes. So a couple of things that come to mind here, David. With inflation at 4%, it's obviously eating into your purchasing power. So to just hold cash and if it's just sitting in a bank account, you're probably not earning much. If anything on it, so you want to continue to try to earn some level of return on that cash, whether that be fixed income or GICs or something else. I think we say this often to clients that we talk to. You have to assess what your asset allocation is, what your time horizon is in making your investment decisions. And obviously, you should be doing that on a pretty regular basis, every half a year or so. But I would just say in terms of getting money back into the market, I just want to make sure everyone understands, I think where John and I both sit on this, I'll speak for myself and then you can chime in, John. But the market is very, very overbought here. So if you're listening to this call, my recommendation is not for you to go out and buy something today or tomorrow. We're going to get a period of consolidation here. As I said, I don't know if that's going to happen today or next week or when it's going to be, but we've been raising a little bit of cash in some of our portfolios just to wait and look for better opportunities. But just to John's point, I think the message that both of us have had over this call is that I think any pullback or consolidation that you get in the market is likely going to be bought and I would use that as an opportunity to start to put money to work. And obviously, you have to look at the framework of where your assets are allocated. And do you need a little bit more Canada? Do you need a little bit more U.S., do you need more international, but all of those are decisions that you should be thinking about on a regular basis. And like I said, John's comment on sort of, I guess, what he's really saying is dollar cost averaging, buying into the market in sort of waves isn't a pretty good thing to do and usually results in not getting whipsawed in the marketplace if you happen to pick the wrong day.

Yes. And David, for those who have heard me speak, we were in a range-bound market for many, many, many months, right? From the October lows of last year through 4,200-ish and I said over and over, if we can break through 4,200 and stay above 4,200, there's little resistance all the way to 4,400 and then we'll have to pause and take a look. Well, we're at 4,387 this morning. So we're pretty damn close to that 44 level. So to Michael's point, that we may have to take a bit of a respite here, right? Just wait, let's watch what the market does, there is some resistance at 4,400. Like there was at 4,200. And we tried, I believe, 7 different times to break through 4,200 before we actually broke through. So technicals matter a lot in our business, and Mike and I both look at the technicals quite extensively. We are up against a resistance level at 4,400 now that will probably make us pause a little bit to see what the next move will be and if there is a bit of a pullback that will be bought, as Michael said, there's lots of money waiting for that pullback, like there was at 4,200. The problem with 4,200 was it broke through and it didn't look back. We're at 4,400 this morning on the S&P 500.

Okay. Great. Let's get to the questions from those that have are tuned in today. Okay. Here's one for you, John. What are the ultra-wealthy buying now? So in other words, what am I not buying, when you were in Calgary in late -- when you were in Calgary in late January, you said they were buying Europe and emerging markets?

Yes. So that has not changed, David. The velocity of that buying has slowed a little bit, but that has not changed. Europe has still become an investable market. It wasn't forever in a day as we've talked about and I mentioned in Calgary a few months ago, but it has become more investable now. Things are a little bit calmer there. So that's for certain that emerging markets in Europe are still being bought. I will tell you something that they're not buying, and that's bitcoin, right? And people always ask me my opinions on bitcoin and the like, it's not going away anytime soon. But right now, it's in a bit of doldrums and the like. So Europe and -- sorry, Europe and emerging markets are still being bought, like I said several months ago, just the velocity may have come down a little bit from where it was earlier in the year.

Okay. Here's one that maybe is asked because of Greg Valliere's note earlier today, what is the pump and for those who haven't read Greg's not today, maybe, John, you can do a little bit of a summary of what he said and why this is now maybe a question that people might be asking?

Yes. It was the same sort of question that people were asking about the U.S. debt ceiling as well, David. I think there's a lot of politics obviously. There's a lot of politics in the U.S. and a lot of politics coming out of Washington. I'm of the mind that we will not get a shutdown. And the reason we won't get a shutdown is, remember, we're leading into a 2024 U.S. election cycle. And I don't think the Democrats, or the Republicans want to be the ones that shut down the government leading [Audio Gap ]

[Audio Gap ] short and shallow if we will have a recession. Your thoughts on that. So if we do get a recession, what's it going to look like, Mike?

Yes, I would agree with the comment on -- certainly on shallow. It's difficult to forecast recession, David, as you know, in this business, there's been [Audio Gap]

I'm typically a glass half-full type guys. So I don't believe we're going to shut down I think we'll go to the brink like we did with the U.S. debt ceiling discussion, and we'll have an assessment that says, "Hey, listen, we'll find a solution and the like. " But look, there's always politics. That's -- again, that's noise in the market that we try to eliminate as much as we possibly can, and I don't believe we'll get a shutdown and [Audio Gap]

Okay. Question about ability [Audio Gap]

[Audio Gap] for something that looks a little bit more like a hard landing. Again, I think John talked about this throughout the call today, but it really comes down to what does the unemployment rate do. So if there's a small amount of job losses in the economy, then we can probably withstand a shallow pullback in broader GDP. If we get a really big uptick in unemployment, either in Canada or the U.S. or both, then kind of all bets are off. So you continue to watch that very closely. But to my eye, just given all the information that I have at the moment, I would say whenever it comes, sometime next year, maybe the following year, hard to know, it's probably likely to be fairly shallow.

Okay. I'll open to either or, but thoughts on energy and end energy stocks so [Audio Gap]

But I think just given the strength of the consumer, which we talked a little bit about on the call today, and just the ability for businesses to kind of pass-through costs at the moment, I think those are both pretty constructive for kind of a softer landing. I think the risk to that scenario is if we're wrong and rates do [Audio Gap] Yes, I can take that. So energy stocks did quite well last year, as everyone will know, part of that was obviously on the Russia Ukraine situation. Energy price went up quite a bit. I think a lot of it was actually just on the expectations that inflation was going to start to pick up and stay high, and we know that energy has historically been a pretty good hedge to inflation, same thing with energy stocks. I still remain medium term, constructive on energy, I think this year on the macro side, if John and I are correct and the recession is either into 2024 or late 2024, a bunch of these other cyclical parts of the market, most notably energy and probably financials should start to pick up a little bit. And so as we talked about when you start to see that money flow out of some of the other, they are consolidating a lot of gains. Some of these stocks were up 300%, 400%, 500% depending on what you're looking at in the Canadian space. So it's not uncommon for that to kind of consolidate. And I think that's what's really happening here. So I think if you have some patience here, I don't know if it's going to be the back half of this year into early 2024. I think the energy tape can be [Audio Gap]

[Audio Gap] regard to GICs, treasuries or other fixed income with yields at multi-decade highs. And the second part of the question is why take the risk associated with equities when risk-free yields are now more attractive. I don't know who wants to talk about that, but it's a really [Audio Gap]

[Audio Gap] the sector remains extremely cheap. The balance sheets have improved quite a bit, and there's a lot of free cash flow for all those companies. So probably going to have to be a little bit patient in the sector, but I think as we move towards the end of this year and into next year, I think it will be a good place to be.

Okay. We've got time for a few more here. So this is going back to, I think, John, you were talking about this idea of FOMO, and it was -- we were relating it to the equity markets. So the question is, and I know, Mike, you're not a fixed income guy, but maybe just a thought on how this might pan out on that side of things?

Sure. I mean, look, I think at the end of the day, it depends on what your tolerance for risk is and what your asset allocation is, right? And so as I said, I run equities primarily and most of my money is in equities. And so it depends on how long your time horizon is. If you need money in the shorter term, are you -- are in retirement. Of course, clearly, you're going to want to have some higher level of exposure to those areas of the market that you're talking about treasuries, other fixed income and potentially GICs. I think if you look at the long-term return profile of those instruments, particularly GICs, you generally lose out to stocks over time. Stocks tend to give you a better return. Obviously, with a little bit higher level of volatility. And so it's difficult to know exactly what the future is going to bring, obviously, but I think if you take a look at the long-term return series of equities and add in the dividend yields that you receive on many of the stocks that we would own in a variety of portfolios at AGF, it tends to be a better risk/reward trade-off than some of the other instruments that you're asking about.

Yes. And David, just a follow-up on that. If I had to look into my crystal ball 6, 12, 18 months out, my base case is that rates are lower 12 months out than they are today. So think about it this way. If you're sitting in a GIC at 5%, which is a terrific return, by the way, risk-free return 12 months from now when that matures, odds are in my base case that the rates will be lower, and you won't get 5% for the next 12 months. But that 5% is a bit of a drug, right? People like getting a return on their investment and on their money. So my gut tells me that a portion of that money that's sitting in a GIC or in a treasury will find its way into the equity markets and look for that return yet again. And to Mike's point, history tells us that the equity markets will give you a better return longer term than a GIC or treasury does. So we'll keep a close eye on that. But base case, from my perspective, is we'll have lower rates 12 months from now when a lot of these GICs start to mature and people invested in those will try to reallocate that capital into somewhere that get them 5 or 6 or 8 or 10, whatever the number is that they're looking for in their return profile.

Okay. Good stuff. Okay. Here's one for you, John. You advise that it's not timing the market, but time spent in the market?

Correct.

Yet, today, we've talked about not going all in or not pulling or plowing all out. And the question is, is this contradictory, so please explain John?

Oh, I love it. A little controversy it's outstanding. No, it's not controversy at all because here's what I was talking about. The question was posed to me, if I have extra money sitting on the sidelines, how do I start to allocate that money in. The premise that I come from is you've already invested in the market, and you've got some extra cash. If you have some extra cash, yes, you want to look at legging in or dollar cost averaging, as Michael said, that additional money into the market, and look for opportunities, but always staying invested in the majority part of your portfolio because it is a terrible idea to be all in or all out, right, all the time. You want to be strategic about how you invest your money. And that's the way I would continue to answer that question. The base case is you're always invested. And then if you have extra cash, you want to look for opportunities to redeploy that money. So I hope that clarifies a little bit because I am not a fan of timing my investments all in or all out. It's just too difficult, and you're going to make 2 mistakes as I've always said, your outing invested for the majority of your portfolio is the right approach.

In fact, legging in is complementary to that idea?

Absolutely. Yes.

Right?

Yes. Yes. absolutely.

Okay. We've got maybe a couple more here. Let me -- here's a question. Again, it's related to -- it's the movement in yields with the movement in the S&P. So the question is, does it make sense that the 10-year U.S. T-bill yield has climbed higher in the last month, while the S&P 500 also moved higher. Is that a disconnect for you guys? Or is that?

Sure. I can take that. So I mean there's a varying relationship between what yields are doing and what stocks are doing, and it changes, and it's not always entirely clear what's driving the sentiment to change. I think in this particular case, as we said, typically, as yields would go up, the market would consolidate, possibly trade lower, certainly in the last couple of years in a higher rate environment. I think what's different about this particular situation, it's just that you've had such a narrow component of the market, as we talked about on the call, that's driving the return. So if you look at a lot of the other set caught up and Tesla and Apple and Microsoft and so on and so forth. So I think if you look at the equal weighted index, which I talked a little bit about, that has had this correlation to higher yields and lower stocks in general. So it's not always entirely clear. I think some of this is also related to positioning, whether or not folks are long treasuries or short-term. So not always a very clear relationship there. But certainly, I think the narrowness of the market has contributed to that, I guess, kind of dichotomous relationship in the last couple of weeks.

Okay. We got 1 more question, and we always get this question, so we'll ask it again. So it's about Gold. So the question -- the actual question is Gold done question mark? So that's the actual question, thoughts?

No. I don't think it's -- from my perspective, it is not done. We're off $50, $100 from the highs. But again, it's got good legs. It's got -- the chart is still constructive, has not broken down on the chart. So no, I don't believe that Gold is done and I would expect Gold to be back up above 2,000 -- nicely above 2,000 over the next 3 to 6 months for sure. Not for sure. But yes, I would think that that's where it would go.

The -- as interest rates move up Gold becomes a less valuable part of your portfolio because you don't earn anything on it. And as yields are going higher and GICs are paying you more, you can sell Gold and buy other assets that will pay something there tends to not be a lot of utility and dividends in the Gold sector. As rates peak and start to potentially go lower, and again, we don't know if there's going to be cuts or when those cuts will happen, tends to be a much better environment for Gold. Obviously, we know the U.S. dollar is very critical to the movement in the price of commodities as well. And so if the Fed is going to pause and potentially cut rates, that would likely spur the U.S. dollar to go lower. All of those things are good for Gold. I will also just agree wholeheartedly with John, if you take a longer-term look at the chart, it's gone up quite a bit. It's kind of consolidating around all-time highs here at, call it, 2,000 or so. If we're right and rates are going to go -- excuse me, interest rates are going to go lower. I think the next leg in Gold is going to be up, not down. Nobody owns the sector. It's very, very under own. People hate Gold stocks by and large, in Canada. It's not a huge part of the index. I think if you're patience in this part of the market, you can do quite well. I have exposure to 3 or 4 Gold names in the funds I've managed.

All right. Great. You guys make it sound like the charts are like the modern-day treasure amount. Okay.

David, it's a tool in the toolbox.

There you go.

There's many tools, but it's one of our tools, yes.

Okay. I think that's it for today, guys. But maybe I'll just get a quick final thought from each of you. Mike, maybe we'll start with you and John, you can finish this off.

Yes. Look, I think it's been a -- certainly been a tricky year depending on sort of where you you've been looking. I think the narrowness of the market has caught a lot of people by surprise. I would just say if you step back and forget about those 7 or 8 stocks that have done very well, we're up, let's call it, 3%, 4%, 5%, depending on whether you're looking at Canada or the U.S., and we're at the halfway point of the year. That's basically right in line with what you get for average returns for the stock market. So it's not a terrible year for equities considering especially what happened last year and sort of where interest rates are and where inflation is. So I continue to remain constructive on the long-term outlook for stocks. And I think absent something that we're not aware of in the marketplace at the moment, so I think we're getting close to certainly peak rates, and that will be beneficial for both earnings and stock multiples. So still very constructive here over the medium term.

And then over to you, John.

Thank you. I'd like to disagree with Michael, but I cannot disagree with Michael. I am on the same page here. Although I will warn that we are getting to a point in the market that we may need a bit of a pause or consolidation, which I mean it goes a little bit sideways. But going into the end of 2023, I'm still constructive. I do like what I see positioning was so bad, David, at the beginning of the year, and Mike and I talked about this, where everybody hated the market, everybody was sitting in cash and the like, that's an impetus for the market to go higher. That positioning is starting to change. Sentiment is starting to change. People are feeling a little bit better that the recession isn't on the horizon and maybe into 2024. People are putting more money to work, but we need a bit of a pause here around 4,400 on the S&P, and then we'll reevaluate the next move, but still fairly constructive going into the end of 2023, relative to where a lot of people were earlier in the year where they were very, very negative. People are getting a little bit more constructive now.

All right. Well done, gentlemen. That brings our discussion to a close. And thanks, as always, to everyone tuning in today. On behalf of John and Mike, we appreciate your time and support and look forward to sharing our insights with you again next month. Before you go, please make sure to click the ad session button in your attendee hub to register for our upcoming market update events, including our next installment, taking place on July 19, 2023. To complete your CE Credits today, please complete the survey available to the right of your screen or at the top of the home page in your attendee hub. Please note, you may only submit answers for your survey once. However, you may have the opportunity to go back and edit responses if needed. See you next time, everybody.