North American Equities: Volatility Season Begins

Transcript

Here we are, September 1st.  It's a Monday.  It's Labor Day.  Turn the calendar page on another short Canadian summer.  Anyway, hope you had a great summer and were able to accomplish all the things that you had set out to do.  Certainly an interesting month, August, but we're coming into a volatile time of year.  We alluded to this in the last podcast, but September, on average, is the most negative month.  And October, on average, the most volatile.  So highest highs, lowest lows.  And November is pretty reliably a solid month, as long as consumer spending holds up okay.  We get the Santa Claus rally.  And so lots of reasons to look for potential volatility.  Within August at least, we had Trump and Putin getting together in Alaska.  Ideally laying out the framework for a deal.  It doesn’t seem a deal is imminent but Trump has put 50% tariffs on India for buying Russian oil.  So trying to find ways to put some pressure on Putin to ultimately try to force him into a ceasefire and potentially a peace deal.  We'll certainly keep an eye on that and see how that progresses, but that could move markets.  Probably very interesting ruling is that tariffs were deemed illegal.  Everything that Trump has done in the last few months, the pretense for doing them, the emergencies he declared are not considered valid emergencies, are not sufficient to bypass Congress in imposing tariffs.  So worst case here, this is actually—it's pending appeal.  It could go to the Supreme Court.  But potentially, there could be repayment to countries for the tariffs that were applied.  So billions of dollars could ultimately have to be repaid.  We'll certainly watch and see how that plays out.  We've got Trump trying to pressure one of the governors of the Federal Reserve, Lisa Cook, to try to force her out.  And what's interesting here, regardless of what you think Trump is trying to do, whether it's good or bad, one thing we do know is he has bypassed say the institutional imperatives of the United States.  There's U.S. exceptionalism, if you believe it's predicated on these structures and systems that put in place that Congress, which is reelected every two years, has all the powers within government.  You've got a strong, independent central bank that can rule and support the economy independent of the government.  If you believe those are critical tenants, those are potentially being compromised under this administration.  Of course, what happens when there's the next administration?  Does this downward spiral they're unwinding of these organizational constraints, does that continue and make things worse?  And certainly some would point to Nixon, President Nixon, and his pressure on the Federal Reserve to cut rates, which is what led to the super high inflation.  And then the Volcker era, which brought about some deep recessions to try to bring inflation back under control.  So it really is what you believe about these things and what the long-term impact of some of the behaviors are going to be.  But there's certainly a lot to watch as these things work their way through the courts.  Also got NVIDIA, of course they reported.  It was a great quarter.  The numbers are fantastic.  The growth in AI absolutely continues.  It's priced at 31 times forward earnings.  That's not crazy, people.  It's not crazy at all, given how much is being spent in this area.  Every build out, there's money made.  There's losers.  There's winners.  Whether it's the PC era and we used to track the entire PC supply chain as PC growth was there.  And all the internet equipment providers, that was all the chatter.  Mobile phones.  So as AI gets built out, the value chain is going to shift.  And there will be too much money spent.  But right now, we're certainly in a big build out phase.  But the point is, with a 30 times forward earnings, it tells you that investors are not counting on growth forever.  That's not a crazy number.  Which is very rational that NVIDIA isn't going to grow forever in terms of supplying the infrastructure.  But they're indicating—if you believe Jensen Huang that there's a lot to come yet.  That this will ultimately be a multi-trillion dollar spend.  As different governments get in on this, there's certainly evidence that may be the case.  And so if the growth is decent for longer than expected, then certainly NVIDIA will continue to be a very good investment.  If you'd paid 60 times forward earnings for NVIDIA back in 2021, you would have made a pile of money, like 500%.  So it's all on the growth versus the expectations, and the expectations are not crazy.  Anyway, we continue to track the spending in AI, but as alluded to, gold and AI.  There you go.  There's your barbell trade.  So lots happening.  Jerome Powell's last Jackson Hall Summit.  So as Trump continues to put pressure on the U.S. Federal Reserve, likely going to cut rates.  And certainly his speech indicated that.  Likely rate cuts coming in Canada as well.  Our GDP number was not good.  That was sort of expected given the tariff impact and the export dynamics associated with that.  But internal domestic consumption was not bad. And domestic investment was not bad.  Anyways, some good things when you peel back the onion a bit with Canadian GDP, but certainly the pretense to cut rates in both Canada and the U.S., which would be supportive of markets.  While you've got these external events with regard to whether it's achieving some level of global peace, again, the institutional imperatives, whether those are going to hold up, those can all trigger a bit of volatility.  Anyway, a lot to watch.  Hang on to your hats.  Interesting time of year.  And we'll check in with you in another month.