Well, we have been enjoying-- or at least if you're long the market-- enjoying a summer rally in stocks. Investors trying to figure out now, what's next for the markets? What's next from the US Federal Reserve? Could they actually be ready to pivot from their rate hiking cycle? Well, our featured guest today warns that we might be in a classic bear market rally. Joining us now, Michael Craig, Head of Asset Allocation at TD Asset Management. Michael, great to have you here. I mean, this is the question of the summer for investors-- can we put faith in this rally? What are we seeing here? Well, we're coming off really, really bombed out sentiment levels in late June. And I think you go into the summer, people are on vacation, liquidity is light-- and this is classic bear market dynamics where you get these double-digit rallies off depressed lows. And so the question is that we put the lows in and is this sustainable? And I would say, look to next two months are typically very challenging seasonal periods. I would be quite cautious going into September at these levels after seeing such a big double-digit rally in the bond forces. INTERVIEWER: Because, of course, the big story of the year has been inflation. And it kept moving higher and higher and higher and really sending shockwaves through the market. So we got the Canadian number today. We're starting to ease, but still uncomfortably high. We got the US number recently. And the market rejoiced in the fact that, oh, it's only 8.5% instead of 8.7%. And then these expectations think, well, then the Fed will just pivot off of all this. I mean, these sort of lofty expectations-- are we getting a little ahead of ourselves if that's your market thesis? Yeah, it's pretty-- you're really looking at the market with rose-colored glasses. It's like losing weight. The first five pounds is easy. It's just water. And then the hard work begins. And the inflation numbers came off as a function of gas prices and used cars. And these are all very cyclical factors that I don't think should shock anybody. But again, summer dynamics, not a lot of people in, you had some good news on the back of a bleak outlook, and so the market really ran with it. For us to take this, then, and say, well, the Fed is going to pivot, is a bit of a stretch. We're probably going to be around a 5-handle by Christmas on inflation. But the real challenging part is the structural aspects. And I do believe they will fall, it's just going to take longer. And that's really what gets you into the owners equivalent rent and some of those metrics, which tend to follow employment. And they will take a longer time to roll over than more cyclical factors. And so we're still going to be talking about inflation well into next year. And I don't think the Fed can really pivot until they have inflation on a 2-handle, which I think is going to take longer than many think. Is part of the discussion, I guess, perhaps, around the Federal Reserve table or the Bank of Canada-- that central banks seem to have lost a little bit of the faith of the people? Earlier this year, it's like, don't worry. Inflation is transitory. We don't have to act too aggressively. And suddenly, it seemed like inflation had caught them out. Do they have work to do still to sort of restore our confidence in their ability to keep inflation in check? I think broad media still has them under the gun. But if you look at the market expectations of inflation, they have come quite a bit lower. So in terms of market participants, I think long-term inflation expectations are-- anchored might be too strong a word, but are certainly not getting away from them. And the Michigan data on five-year expectations came out last week and it continues to trend lower. Shorter, year out, higher, but I think people think long-term inflation expectations are starting to come re-anchored. And the various Fed governors have all come from all different walks of life in terms of doves, hawks-- they have been uniform in terms of saying we're tightening policy until we get inflation under control. Very rarely do you see them all singing from the same choir book, if you will. So that's where I think you have to take them at their word and believe that they're going to continue to tighten or have tight policy until inflation is well under control. If we take them at their word then in that they are going to do whatever they need to do to get inflation under control, could that mean a recession? The whole point of raising rates, right, is to start slowing what seemed like our insatiable demand when we were living off of cheap money for every asset we get our hands on. Obviously, they don't want to create a recession. But if a recession is what it takes to get inflation under control, they will take that. So the other thing too I think people need to understand is that we're going to see hikes into the end of the year. But they're going to stay high for some time. The bond market's kind of looking for cuts as early as middle of next year. I'm not certain that's going to be in the cards. And so we're going to go through a period where money is going to be tight. It's going be expensive. And that's what's going to hurt. We're going to get used to higher rates as they keep hiking, but it's that extended period of time with very, very restrictive policy. That's where I think you get into the recession situation because the cost of money is so much higher than it has been in previous years. Given all of that, what do we do as investors? I think it's pretty fair to say when you talk to the average investor, they feel burned by what happened in the first half of the year. They're a bit puzzled about what's happening right now-- don't know whether they can trust it. What do we do with our money in times like these? Well, first, it's the old adage-- if you look at a longer term chart-- an index chart of returns, this is a little bit of a blip. So we've got to put things in perspective. It's no fun being down 10%. But we've had it pretty good for a number of years now. So I always say, step back to what you're trying to solve for the biggest risk for investors is getting to the day when you need the money and not having the money there. In terms of the next 12 months, a few things-- one, the bond market's had a really rotten six-month start to the year. Bond investors for a long time have been under pressure because yields haven't been very attractive. Today, I think you can look at the bond market, and yields are far higher than they have been in the past. And that's something that we're looking at in terms of looking at bond yields of 4% or 5% all in yield on an investment grade index. So that's attractive. On the stock side, I would be cautious short-term going into the fall. But at some point over the next 12 months, I think it will be very opportune levels for kind of longer term capital accumulation. And the third thing-- what gets lost this year is that last year, everyone was an expert in investing. A lot of those fads have really been hurt this year. And so it's important to be mindful that we have these mark to markets, they're no fun. But it's that permanent loss of capital, when you have things that just disappear, that's what really hurts investors. And so I would say, particularly going in the next 10 years, that's what you want to mostly avoid is permanent loss. And that gets you into more tangential investments, if you will, and something to be watchful for as we come out of this and we start to recover. It sounds like if you still want to have that balanced portfolio in the longer run, it has proven to work for us. I think that faith being shaken-- you talked how miserable it was in bonds in the first half of the year because people were looking and saying, OK, my equities are down. But luckily, I'm a diversified in my portfolio, whether that's 60-40 or whatever math you sliced up-- let's look at my bonds. And it was like, oh, and then their bonds as well-- that was a bit of an anomaly, right? We were sort of going into unprecedented times where bonds were going to suffer to that degree at the same time that equities were suffering to that degree. MICHAEL CRAIG: Yeah, I haven't actually been alive since the last time we had a start that terrible. And I'm not that young. So it is a bit of an anomaly. I think there is lessons to be learned. The first half of the year, outside of energy and commodities would be the only really places to have hit out. And I do think we need to be mindful that of the next 10 years, stagflationary periods, something that we haven't seen for a long time-- we did see in the first half of this year-- are more likely than not to occur again. And so there are, certainly, areas where you can evolve the balanced portfolio-- our sense would be to use commodities. And so there's room for improvement. But to abandon the strategy, I think, is unwise. Because you go through these periods, you have a tough, miserable time, but it does set you up for future higher returns as valuations are far more attractive today, even in equities, than they were at the beginning of the year.