The Upside: September’s top five market highlights

[00:00:42] Kyle Cheropita: Hello, and welcome to The Upside. I'm Kyle Cheropita. As we do every month today we're counting down the top Fidelity Connects highlights from the past month. Connects is first presented as a live webcast for financial professionals and then released on replay for all as a video podcast with new episodes dropping daily. Let's take a look at the big stories from September. Clip number five today. David Wolf is a portfolio manager on Fidelity's Global Asset Allocation team and is also a former advisor to the Governor of the Bank of Canada, having worked under Prime Minister Mark Carney. On David's show this month he spoke at great length with host Pamela Ritchie about rates and inflation. In this clip he speaks to being patient and his team's outlook for Canada.

[00:01:26] Pamela Ritchie: You've always said you can afford to be very, very patient with certain types of investment. What does that mean today?

[00:01:32] David Wolf: There are a bunch of different things in there and I'll unpack some of them and then we can go there. First, with respect to monetary policy in Canada, again boring, not that interesting. What's a lot more interesting, as you alluded to, is this ambitious agenda, particularly at the federal level in terms of getting the economy going, getting productivity growth restarted in this country. We're looking a lot more at fiscal policy, not just how much borrowing the government does but what that money is being spent on in terms of expanding infrastructure, et cetera, ultimately, the economy's capacity to produce which is what drives those productivity gains and longer term growth.

[00:02:17] Now, the Prime Minister as I know personally very well is a force and if anyone can get through the red tape, bureaucracy, entrenched interests, et cetera, to get some of these bigger projects done, it's him. We'll see if even he can manage it because there's a lot of headwinds that way but we'll see. Our move back into Canada is going to depend very much on the success, particularly at the federal level, in terms of laying the foundation for that better economic growth over a longer period of time.

[00:02:52] Pamela Ritchie: It sounds like, I don't know if it's a couple years out but there's going to be some spending, there's been lots of announcements lately, that is going to happen right now and is government funded entirely and it's close to shovels ready type projects. They're happening now. Over the course of what it sounds like a couple of years there's a major projects office as you well know. That is the kind of stuff you'll be watching to see how that unfolds 'cause they are sort of there meant to get rid of red tape, frankly, and get things moving. That's part of what they're doing there. Is that process something that you're watching extremely carefully?

[00:03:23] David Wolf: Absolutely. It's not something where we're going to make a different decision today, tomorrow, next week in terms of how that goes. We'll see over time. One of the important points you mentioned about patience, one of questions I've gotten asked quite a bit in recent months is why are you moving back to Canada with your investments? Canadian economy may be in recession. The U.S. seems to be doing great. U.S. market has been on fire. What are you doing? The answer to that, again, is the sort of forward-looking and long term approach that we tend to take. Canada's current struggles were very visible many months ago.

[00:03:58] Pamela Ritchie: Like the mortgage '25, '26.

[00:04:00] David Wolf: Yeah, the resets on rates, the headwinds from tariffs which were very clear in the second quarter in terms of a big drop in exports, reduced immigration. Regardless of how one feels about that those people spend, they work and that's a contribution to the economy that's not there anymore. So you expected this to be weak. It was discounted by the market, amply so in our view. We're looking out a year, two, three, five, ten to say how are things going to evolve going forward. One of the things our colleague, Mark Schmehl, likes to say is one of the times that you have the best investments is when things are really bad but they're getting a little better. I think that's one way to think about Canada where things economically are, clearly, not very good now but there is a path to them getting better over time, potentially, much better, potentially, a little better, we'll have to see.

[00:04:58] What it means for us is, again, we've been underweight Canadian assets, underweight the Canadian dollar a very long time because the trend had been negative. Now things actually are not very good but the trend is flatter to even slightly positive so we want to bring money back into Canada. Again, we're not dramatically overweight, that will take some time and evidence that things are going in the right direction, but it's been sensible from our point of view in the context of some improvement in the outlook coupled with the deterioration in those U.S. conditions to move money back into Canada

[00:05:37] Kyle Cheropita: Clip number four. Continuing on the Canadian rates topic fixed income portfolio manager, Lee Ormiston, is based in Fidelity's Merrimack, New Hampshire office. He joined Connects on September 18th, the day after the Bank of Canada and Federal Reserve announcements. Here he is discussing the BoC announcements.

[00:05:55] Pamela Ritchie: Let's begin with the Bank of Canada. They were earlier in the day yesterday. They went through kind of the three main issues, labour being one of the reasons, one of their first reasons. Taking a look at what's different from July, inflation, they gave a few reasons for why that's different. The removal of the retaliatory tariffs just seemed to overall take away sort of a, phew, less inflation within the whole system. What did you take from it? What was the tone, did you think, from the Bank of Canada?

[00:06:28] Lee Ormiston: Those are the big three. I think that's what most people are focusing on. The reality is that we've had negative economic surprises over the last month or so. They didn't focus on it too much. They said the labour market softened but the reality is we've seen negative payroll growth on a 3-month and 6-month average. That's not something they want to highlight because of the potential to get people very concerned about it but that's one of the things that's in the backdrop that forced them to hike, or forced them to cut.

[00:07:02] Pamela Ritchie: It's interesting, so getting down into this lower range and discussion for maybe more cuts, off the top did you think that more cuts are absolutely baked in? I mean, markets have their own view of this. I'm kind of curious what you think.

[00:07:19] Lee Ormiston: I think that there are a couple of ways to think about this. They removed the language that basically tied the next cut to lowering inflation. There are a couple ways you can read all of this. There's some people out there who think that they'll just go consecutively. We think they'd probably skip a meeting and go in December. You've got market pricing that's about three-quarters of a cut right now, or about 80% of a cut is priced in by the end of the year so markets are expecting them to get to 2 1/4. I think that's probably a good spot. I would just note, that's at the bottom end of their neutral range so they're still neutral, they're not easy yet but they're at the lower end of the range so you could call it closer to being easy.

[00:08:07] Pamela Ritchie: Interesting. They got asked the question whether they're going to wait until they hear the Canadian budget, that was easily punted, the answer of the question. That said, it may be a slightly new outlook. They are looking to be better with their outlooks. They sort of spoke about the forward guidance being on pause, we know that, and they'd like to get back to that.

[00:08:30] Lee Ormiston: He did punt on the fact that the budget was supposed to be released after the next meeting. I would be surprised if he didn't know what was going to be in that budget before they walked into that meeting. I don't think that's a big concern. I think they'll have a pretty good handle on what the budget's going to look like going forward. I will note on the budget, most people expect the budget deficit to go to 2% of GDP, that's been consensus for quite a while but we saw in that press release that they're talking about a substantial deficit so to my mind does that mean more than 2%?

[00:09:08] Pamela Ritchie: Okay, even more therein. It's interesting on just sort of broadly taking a look at fixed income in Canada with rates coming lower and the overall impact that that will have on rates across a variety of asset classes. There's less of this you're getting paid to be patient, you're getting a little bit less cash from sort of a fixed income perspective because rates have come down. It's a different regime. How does that switch up for investors in Canadian fixed income markets?

[00:09:41] Lee Ormiston: Rates have definitely rallied into both of these meetings. We've seen it come off of the highs over the summer. There's still two-sided risk in fixed income if you look at where base rates are. Then you add ... so our corporate index is another hundred basis points. There's still some two-sided risks there and there is the potential, to the extent you see a downturn, that fixed income will continue to perform.

[00:10:10] Kyle Cheropita: Clip three. In September we were pleased to welcome back Peter Drake. Peter is a self-proclaimed failed retiree who is the former Vice President Retirement and Economic Research at Fidelity and has more than 50 years of experience as an economist. It's now been 10 years since Peter retired from Fidelity and he joined host Glen Davidson for a special sit-down to share his personal reflections and professional perspectives on life after work.

[00:10:37] Glen Davidson: So now reflections on the 10 years that you've been retired at this point, plus the year and a half that you had after TD before Fidelity, what are some reflections you can share with the audience on retirement?

[00:10:46] Peter Drake: Well, one of the things I've begun thinking about, and I still haven't fleshed this all the way out, you'll run into people you haven't seen for a while and they'll say, so how is retirement treating you? What I've learned is that there should be a second question, how are you treating retirement? So my reflection is that you really have a relationship with retirement, and if you think about what a relationship is both sides have to give something, both sides have to get something. There's going to be the odd rocky period but if you contribute retirement will give you things whether you want them or not. Think about it as a relationship. If you're proactive in retirement you're likely to have a good time. I've been at it for 10 years now, a couple of pieces of rocky road, some health issues, but here I am, 10 years out, feeling great, physically active, mentally active. If you treat it right it's a great period.

[00:11:40] Glen Davidson: So what are you doing to fill the time? I think I recall you with a canoe on top of your car all the time when you worked at Fidelity.

[00:11:46] Peter Drake: That's true, that's true. Occasionally, I'd sneak the canoe along when I was going out of town to speak but don't tell my former boss that. Well, I'm a great believer in exercise, use it or lose it. I'm a great believer in mental exercise. I still do economic presentations for a small investment group. I've done some volunteer work. I've run a club for retired people. My wife has a long list for me to do of which not very much has been done. The problem that I have, and I've got two grandkids and that's a great way to spend time, the problem is not filling the days, the problem is trying to figure out what your priorities are. I'd like to turn the question on you because you were telling me you thought about retirement, I think, a year and a half, you're about a year and a half in so you're not as far along as I am. How are you finding it?

[00:12:39] Glen Davidson: Not as far along but I'm catching up. I like what you said, Peter, about managing retirement and controlling it. Certainly, what I wouldn't have expected is the fact that bills still come in. Life is expensive. Life also happens. But it's good to keep busy, it's good do do things that are meaningful, and I've tried to control that, be part of charitable foundations as well but also to be keeping the calendar busy even with things like this which I'm fortunate to be able to do. I've also found out that Costco's busy any day of the week. I thought that it would be wonderful going during the week. It's been wonderful but the time's gone very quickly and I have a lot of people booking lunches with me on a regular basis to pick my brain about a number of things but in particular about what's retirement all like. There's usually a fear from people that they may not have things to do, and I think they'll find lots.

[00:13:29] Peter Drake: You know, that is a fear and it's the unknown. If you ask me some questions later on about the retirement report, we've got something interesting to say about that.

[00:13:40] Glen Davidson: First, before we get there, I'd like to ask about one other thing that goes with the canoe, I think, which is the trombone. I read that you play the trom-, I don't think the crew has a trombone for us to bring in, we don't have space in here, but is that something that you've honed and should we...

[00:13:53] Peter Drake: I did spend a lot of time playing trombone. I actually got paid for it on occasion. I can't do it anymore because I have an eye issue called glaucoma. I can't do a downward dog in yoga and I can't play the trombone. That's a great example. I'm not a great singer but I turned to singing and I've been a member of a choir for a long time so I can still do music. The point about that is sometimes you've got to change the way you're doing it but you can still do it.

[00:14:20] Glen Davidson: Well, I hope we can have you back another time for a webcast where we can have you sing a little bit.

[00:14:26] Kyle Cheropita: Clip two today. Denise Chisholm is a frequent guest on both Connects and The Ppside. Here she shares with Pamela a look at energy as well as her top sectors she's currently focused on and why. Denise is Director of Quantitative Market Strategy within Fidelity's Quantitative Research and Investing Group in Boston. Take a look.

[00:14:45] Pamela Ritchie: A couple of questions going to different sectors. We might circle back to this one as well. Asking for your outlook, I think this is at the bottom, for oil, gas, the energy side of things. Looking a little further out, so a year and beyond ... it's been a rough go, there's lots of oil, how do you take a look at the energy sector, that particular part of it?

[00:15:07] Denise Chisholm: I think it's still going to be rough. I think that the main reason why it's so rough is the renormalization in profits. Look, that can go two ways. I mean, it can go quickly in time, meaning that profit margins can fall a lot and maybe you'll get a different answer from me in six to nine months. Or we can sort of drift lower, like we have been drifting lower, and it takes two to three years to get to more normalized profit levels. To me, this is the biggest statistical headwind for the energy sector, which is to say that 2022 was the most profitable this sector has ever been. That's a problem from a starting point perspective. When you have an oversupply situation, yes, we can debate how oversupplied it is but when you have that situation on top of the fact that you are already starting from a very profitable level, you are much more likely to continue to normalize. That means the energy sector is seeing margin compression at the same time where other sectors in the United States are not seeing that. So from a relative perspective it looks much worse.

[00:16:11] Now, I think that there are a lot of investors that say, well, the fact that the stocks are cheap should offer some downside protection. This is where I think history can help. I can show you the statistics that that's usually true in homebuilders. I can show you the statistics that that's usually true in technology. And I can show you statistics in energy where that has not been the case historically. Energy is the only sector where you get trough multiples on trough margins, meaning you get bad business conditions and you get cheap stocks on top of it. That makes them very tricky to play to be early from the cycle but it also makes them go up a lot when you have that bottom of the cycle because they're one of the only sectors where you get that dual tailwind coming out of a downturn. So there will be a time when energy can not only keep up but will easily beat the market but I don't think that we're there yet, and it could take as long as two to three years to get to those normalized levels.

[00:17:11] Pamela Ritchie: Let's ask, actually, just for your sector line-up, top and bottom. I think you said tech, tech, tech for your top three in the past. Let's get those in. I want to ask you about Fed independence because we really need to get your thoughts as we get closer to this meeting. But yeah, top three, bottom three in the sectors.

[00:17:28] Denise Chisholm: I will say my top three have basically been the same, tech, financials and consumer discretionary, and I keep changing the rank order. The last time I really wanted you to focus on technology and then it was financials and then consumer discretionary. I'm going to re-rank them again. Tech is still the first. I do think it's the best risk-reward, they have the best fundamentals in the market. Now I would say consumer discretionary given the rate sensitive nature and the fact that I think that the translation mechanism is much more impactful this time around, and specifically because I think homebuilders are a better risk-reward this time than last time, consumer discretionary is now ranked number two. Financials would still be number three. I do think that as much as I'm enamoured with banks because they have a good starting point on valuation themselves I do think brokers in capital markets look much more interesting from a leverage to the market perspective, which I think that we're in a secular bull market. 

[00:18:18] On the downside let's pick on energy again. I would say that energy is not a sector that I would recommend owning. I would pick on, in conjunction with energy, the utility sector. So, yes, it's in the bottom half of the distribution in terms of the valuation, no, I don't think it's a really succinct AI play just from a sector level. You can certainly say it's one of the better defensive sectors, or at least it has been, but I think that creates its own negative risk-reward. Usually you want to sell utilities after they've worked. They've worked, and while fundamentals isn't necessarily negative I do think that when you see sort of the Fed cutting in a non-recessionary perspective utilities has one of the lowest odds of all the sectors. In terms of not to own energy, utilities and then all adding consumer staples is your other classically defensive sector that I think has a negative risk-reward.

[00:19:11] Kyle Cheropita: The number one clip today. Portfolio manager and Chief Investment Officer, Andrew Marchese, leads the Fidelity Canada Investment Management Group and he joined Connects to start off the month. Here's Andrew's summary on what we've seen in markets recently.

[00:19:25] Pamela Ritchie: Let's talk a little bit about the state of the markets, what we have seen and, really, ask you why the resilience is here. It does seem, even after a wobble of a few days, we're still climbing.

[00:19:36] Andrew Marchese: Through my lens I think ... you always point to a couple of things in the pillars of investing. One, we'll talk about earnings and two, we'll talk about interest rates and liquidity and lastly, valuation. On the earnings front, we came into the year where on the S&P 500 earnings forecast was for about 12% growth. As we know we kind of walked through the tariff announcements, Liberation Day on April 2nd. Shortly thereafter forecasts on Wall Street went from about 12% to about 6.8% at the lowest. Tariffs, the can got kicked down the road a little bit, some delays, some got ratcheted down. All in all now, earnings forecast is for about 9% earnings growth on the S&P 500, which actually isn't so bad and actually in line with history. We were talking off camera about typically every year you start the year kind of almost too optimistic. Those numbers get ratcheted down a little bit but going from 12% to 9% growth, if indeed the 9% turns out to be true, isn't actually so bad and is in line with history.

[00:20:43] I think what has kind of catalyzed the leadership off the bottom, April 8th, the U.S. has actually kind of taken over. Everybody was talking about rest of the world, it's actually been the U. S., and more specifically, the Mag Seven, or large-cap growth. I think that really dovetails with fiscal policy, so Big Beautiful Bill, and then the market quickly turned to Fed independence and just talking down interest rates. The administration has been talking down interest rates since April and it's gotten louder every week that's transpired since about Liberation Day. The market's looking forward and pricing in the fact that, okay, maybe the tariffs do slow down the economy to a degree. And that is actually happening, it's showing up in economic numbers. For those out there who have heard me speak before, I've talked at length about cycles aren't what they used to be. There's not these boom-bust cycles that we've seen historically going back many decades.

[00:21:48] Pamela Ritchie: Is that good for investors?

[00:21:50] Andrew Marchese: I don't know if it's good or bad. I think it is what it is. You never get too far away from, if we use 50 as the barometer for PMIs and service PMIs, you get a little above 50, a little below 50, but you never boom-bust. Aome people would say that's actually a good thing. Now, what it does do, which makes investing a little bit more tricky, is you have to be a little more attuned to where the leadership may come from. I think because you don't have those conventional cycles, which were a little bit more predictable around what a recessionary cycle looks like and what sectors or factors lead at various points during that investment cycle, because you do not have those clearly defined cycles anymore it makes leadership a little bit more blurred so we have to point to other things. Also, the financial industry in general is changing. There is far more financial engineering with ETFs, factor-based ETFs, smart beta. There are more decisions being made in investment in equities for non-fundamental reasons. We have to be attuned to all that.

[00:23:06] Kyle Cheropita: I hope you found those clips insightful. Each clip is from a full 30 minute video podcast available on YouTube, Spotify, Apple podcasts and more. Here at Fidelity Investments Canada we're putting out fresh content daily so please look up Fidelity Connects or The Upside podcast for more. I'm sure there is a topic there for everyone. The Upside starts as a streamed webcast where you can learn to be a better investor and hear from some of Canada's best stock pickers and leading financial experts. To not miss a show head to fidelity.ca and sign up for The Upside newsletter. Thank you for watching today. I hope you'll join us again soon on The Upside. I'm Kyle Cheropita.