In these notes I often try to put today’s markets into context. For most of the last year sentiment has been so negative that I was often highlighting that markets usually do okay when sentiment is terrible. Today we’re seeing improving sentiment, potentially disruptive technology, and lots of inbound questions about commercial real estate. Diving in.

 

Can I ask a Large Language Model How to Invest?

 

A small number of stocks, many of them AI beneficiaries, have been driving this market higher.

 

When a small group of stocks are outperforming and driving the market higher, the market is ‘narrow.’  Historically, markets have performed well even when market breadth narrows.

 

Interestingly, if we remove the fifty largest stocks in the S&P500 the valuation on the remaining 450 stocks is just 15x forward earnings, that’s a full one standard deviation below the S&500s historical average.

 

More aggressively, the chart below compares the current market to 1999 when the dot.com bubble caused the S&P500 and the NASDAQ to go parabolic. This is a fitted line and not a prediction, but (and I realize no one remembers what was said in a sentence before the word ‘but’) the AI rally could be in its early innings. When I think about other disruptive technology it’s often the hardware (including chips), compute, infrastructure, middleware, and then the application layer that rally.  In AI, the hardware and compute has rallied but we haven’t really seen the application layer, which is where things can get really frothy as investors become excited by large TAMs (Total Addressable Market).

 

Investor Sentiment

 

Investor sentiment isn’t good but it’s clearly improving if we look at broader sentiment readings or equity buying intensions. Below we have the BofA Bull & Bear Indicator, which was at 0 back in October.

 

Cash balances are coming down but remain elevated relative to historical levels.

If we look at seasonality for the S&P500 over the last twenty years, a consolidation in the end of June is not unusual. You may also notice in the 1999 NASDAQ chart (above) that the NASDAQ pulled back in the summer of 1999 before things really took off later in the year.

 

Commercial Real Estate

 

“Do we own any commercial real estate?” has become one of the most consistent questions we’ve received this summer.  When we start peeling back the layers it becomes clear that the question isn’t about all commercial real estate - we’re specifically being asked about exposure to the Office subsector.  Here the response becomes more nuanced, since our portfolios typically don’t have direct exposure to Office, but investor will often have indirect exposure through insurance companies, bank lending portfolios, and their pension (including CPP). We often drive the point home by asking the clients to make a mental note of who owns the office buildings they visit. Often, you’ll see branding for the building owner, like Oxford Properties (OMERS) or Cadillac Fairview (Ontario Teachers Pension Plan), in the lobby.

 

We also share that there are real estate subsectors where we see opportunities in today’s market. These subsectors include self-storage, industrial, and multi-family. Like all things in investing, we need to be selective and look for attractive opportunities. In today’s market, this often includes identifying investment vehicles that have long term fixed rate mortgages at low rates that are already in place.

 

(For CIBC’s compliance and marketing folks, please note that I’m not making any recommendations or solicitations in the paragraph above.)

 

What’s an Investor to do?

 

Wading through a sea of conflicting data points is common in investing.  As result, we recommend investors save and invest at a regular cadence, like putting a portion of your earnings aside every week, or every month, or every year for investment. By saving and investing at a consistent rhythm across market cycles, an investor will end up buying more securities when the market is inexpensive and fewer securities when the market is expensive.

 

We continue to recommend a barbell strategy where high-quality companies exposed to secular themes provide exposure to equity markets. The other side of the barbell is: cash, actively managed fixed income, and alternative investments that reduce volatility and provide ballast for portfolios. For investors in the distribution phase of their lives, the focus expands to optimize the tax efficiency of distributions.

 

Please contact me for a more detailed discussion.

 

Delli (delli@cibc.com)

 

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