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[theme music] >> Hello, I'm Anthony Okolie in for Greg Bonnell, and welcome to MoneyTalk Live, which is brought to you by TD Direct Investing.
Every day, I'll be joined by guests from across TD and beyond, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today show, we will discuss whether valuations are looking stretched as the US continues to hit record highs with David Sekera from Morningstar Research. We will also have a look at the latest TD Direct Investing investor sentiment index. And in today's WebBroker education segment, Jason Hnatyk will show us how you can make conditional orders using the platform.
And here's how you get in touch with us.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
And before you get our Guest today, let's get you an update on the markets.
We will start here in Canada with Canada's main stock index, it opened lower as the rotation out of mega-cap tech winners continued on Wall Street. We are seeing gains in oil and defensive shares that are helping to limit overall market losses.
Currently the TSX is down 111 points were about half a percent.
Turning to look at some of the big movers, West Fraser Timber, shares of the Canadian lumber company is getting a bit today.
There's been no bounce back from a year and 1/2 low with that we reached on July 15. What has fuelled that is increased demand expectations for wood and construction materials in major economies.
Shares of West Fraser Timber currently trading up, let's get that on the screen here, it's up just over 3%.
Some other big movers today, of course, shares of Shopify are under pressure again. We are seeing that rotation of some of the big tech names and Shopify getting caught up in some of that weakness. Shares of Shopify right now are down just over 6 1/2%.
All right, let's turn to Wall Street which also opens lower amid the slump in technology stocks. Currently the broad-based S&P 500 is trading down the 67 points or just over 1%.
Again, that selloff in technology is hitting the tech heavy NASDAQ compensated which is also trading lower.
It is down almost 2 1/2%, about 450 points at this moment.
Again, we talked about that rotation out of some of the big tech winners. One of the stocks that is being impacted, of course, is chipmaker and video.
This is offering the latest sign of investors pulling back on mega-cap tech after a monster on this year. The stock is currently down to the tune of almost 5.8%, more than seven points. And that is your market update.
Well, US markets have hit new record highs in recent trading sessions as the big tech names continue to push higher, but are valuations beginning to look stretched?
Joining us now discusses David Sekera, chief US market strategist with Morningstar Research.
David, thanks for being with us today.
>> Of course. Good afternoon. Always good to see you, Anthony.
>> You too. Let's start with market valuations which are looking stretched after the big run we have had. What are your thoughts?
>> According to our evaluations, at this point, they are not only stretched but the market in the US is starting to trade pretty far into overvalued territory. When I look at the market valuation, it's trading at a six or 7% premium to a composite of our fair values. Let me explain a little bit how we look at the market versus what you may hear from other strategists. We cover over 700 stocks to trade in the US what we do is put together a composite, the intrinsic valuation of all of those companies as determined by our equity analyst team using a fundamental, bottoms up analysis, and then compare that to where they are trading in the marketplace and when we look at that today, that's how we get the price to fair value showing that 67% premium. I have to say, this is pretty rare territory that we are in.
If I look back to 2010, the markets only traded at this much of a premium or more only 1% of the time.
The last time the market was getting to be this far overvalued was at the end of 2021, when we are entering 2022. When I think about the market right now, even though the market is pretty far overvalued, it's always tough to know when we are going to see that correction. I do think there is a possibility where we could be in one of those markets where it could stay overvalued for a while, similar to 2021, until there is a reason for it to correct.
So I do think now is a good time for investors to review your asset allocations. If your equity allocation has run up to far over your targeted percentage, now might be a pretty good time to lock in some profits, sell a little bit of that down and get back towards your long-term targeted allocations.
>> Yeah, it looks like we are seeing a bit of that rotation happening in the markets of the last couple of days. Now, we have surpassed the former highs that we saw in 2022. How do current conditions differ from that?
>> In our 2022 Outlook, we noted that at that point in time, we thought stocks are overvalued and investors should have been underweight in equity at that point in time. When I look at the conditions now versus then, they are actually pretty different. In the beginning of 2022 in our annual outlet, we noted that there were four main headwinds that the market was going to have to contend with back then.
We were projecting inflation increase, we were forecasting long-term interest rates to increase, we expected the Fed to start tightening monetary policy and our US economic steam is forecasting the US economy to slow. All of that came to fruition in 2022.
Stocks plunged, but the market did with the market always does, it acted like a pendulum and it swung out too far to the downside. But since bottoming out at the end of October 2022 when the bottom hit, we are now starting to those new highs.
What is different now? Well, three of those for same headwinds are still tailwinds. Inflation, we expect to continue to keep moderating to the rest of this year going into next year. Our US economic steam is predicting long-term interest rates to be on a multiyear decline and we expect the Fed to start easing monetary policy with a cut as soon as the September meeting so really the only had when we have right now is the slowing rate of economic growth. Having said that, our US economic steam is in the soft landing camper we are looking for growth to slow but not looking for a recession.
>> Okay. Of course, the AI demand trend has been a huge component. Can stocks like Nvidia go much higher?
>> That's always hard to say. Fully to overvalued stock can always become more overvalued in the short term before it corrects.
Specifically looking at AI stocks and even more specifically looking at Nvidia, I know our analyst team expects that there is at least four more quarters of similar high growth rates that we have seen over the past couple of quarters. Demand for their artificial intelligence DP use remains extraordinarily high but there are supply constraints. Right now, they can sell everything they can make at whatever price they want. However, I do think the stock probably prices that in and maybe even more. Let me explain. Last year's revenue doubled from the prior year and came in at 60 billion. Our model forecast revenue to double again up to 126 billion for this fiscal year and looking at our model, we expected to grow all the way to 235,000,000,000 x 20 29.
Over that same time period, we are looking for margins to expand and get to new highs. We are looking for earnings growth to get to $2.80 per share this year, going all the way to $5.24 in 2029. That stock is trading at 43 times this year's earnings. In fact, it is trading at 23×2029 earnings.
The key to watch for with Nvidia and a lot of the AI stocks is the guidance from their largest customers.
Specifically, we will be listening to the Spending programs from companies such as Microsoft, Alphabet, Amazon, those are some of the largest buyers of those chips, really to start listening for when they start slowing there Spending, especially if they are going to slow on AI and if that happens, in my opinion, I think Nvidia's stock could be at risk of tamping down.
>> Are you seeing signs of that Exponentially slowing down this year?
>> Not yet. At this point, talking to our equity analyst team, they are looking for another four quarters of that same kind of growth that we have seen in the past couple of quarters so it could be another year where we are looking at that growth but based on where that stock is valued, I think that amount of growth is already priced in.
>> Okay. Great perspective. Again, we have talked a little bit about this rotation out of some of these big Stocks it to some of these sort of average stocks and small caps. Walk us through why small caps and value stocks look interesting right now.
>> In addition to calculating a price to fair value for the broad market, you would also break that down into the component parts using the MorningStar style box. So we will break it down into capitalization, into different styles like value and growth, and when I look at our price to fair value for small-cap and value stocks, small caps specifically it is on a relative value basis are trading at some of their most undervalued levels that we have seen since 2010 and even value stocks are trading at pretty undervalued levels as compared to the market so what I think the market is starting to price in right now in this rotation we have seen over the past week or so, historically, small-cap stocks have performed pretty well when interest rates are falling in combination with the Fed easing monetary policy and to some degree with AI stocks taking all the oxygen in the market over the past year and 1/2, value stocks have gone left too far behind and I think there is that rotation coming out of growth into value.
>> Okay. Besides value and small-cap, what other areas in the market look interesting to you right now?
>> We also break our evaluation standby sector and the three sectors that I think I see the most opportunities in value is going to be real estate, energy and basic materials.
So real estate, of course, it's still the most hated asset class on Wall Street.
Personally, I would still steer clear of urban office space. It models undervalued but at the same point in time, there could be more downside risk before it bottoms out. But we do see a lot of value for investors in real estate that has a defensive characteristic.
Thinking about healthcare, medical offices, life sciences, things like that.
When I take a look at the energy sector, I think that's pretty interesting. We actually have a relatively bearish view on the price of oil. We are looking for a midcycle price of oil to be $55 per barrel for West Texas intermediate but energy stocks generally look pretty attractive even with that bearish view so if oil were to stay here or move higher, I do think there's a lot of upside leverage in the energy sector. Lastly, the basic materials has a lot of really interesting opportunities, a lot of them are very idiosyncratic, specifically areas where the pandemic had led to an increase in food consumption but then we had all those transportation bottlenecks in 2022, that played havoc with supply chains. So what happened was due to that excess demand from the pandemic in 2020 and 2021, a lot of the companies then over ordered in 2022 and what happened is when all of that came in, they had too much inventory and had to pare it back in 2023 so earnings I think were artificially depressed last year. We think that generally the destocking is coming to an end and this year we are looking for more normalize growth patterns going forward. Two areas that look particularly interesting to us would include manufacturers of food additives as well as manufacturers of potash.
>> Great start to the conversation. We will get to your questions about US equities for David Sekera in just a moment. And a reminder that you can get in touch with us at any time.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Now, here's an update on the top stories in the business world today and look at how the markets are trading.
Shares of chipmakers are in the spotlight amid reports the Biden administration was considering severe trade restrictions as part of a chip clamped down against China.
According to Bloomberg, the US has floated the idea of using a strict export measure called the foreign direct product rule, which could severely limit firms like Dutch chip firm ASML and Japan's Tokyo electron from selling the product to China. Amplifying the worries, former US President Donald Trump told Bloomberg business week that Taiwan should pay the US for its defence, which wait on shares of Taiwan chip making giant TSMC. On the earnings front, healthcare giant Johnson & Johnson topped Wall Street estimates for second-quarter profit and revenue, driven by strong sales of its drugs including cancer treatment Darzalex and a blockbuster psoriasis drug Stelara.
While drug sales came in slightly ahead of estimates and medical device revenue fell a bit short, spending on research and develop it was about 15% below expectations.
Shares of J&J have struggled this year amid concerns over his anti-inflammatory blockbuster drug Stelara which will soon face lower price competition, as well as ongoing litigation over the Talc lawsuits.
Johnson & Johnson is up over 3%.
In more earnings news, US tracking firm J.B. Hunt Transport Services reported 24% drop in second-quarter profit amid weakness in their truckload and intermodal businesses.
Operating income fell 31% in the intermodal segment on higher wage costs for both driver and non-driver.
Also weighing on income was underutilized equipment ownership expenses, increased spending on maintenance and higher costs for insurance and claims compared to revenue.
And here's how the main benchmark index in Canada is trading.
Right now, the S&P TSX is down to the tune of 123 points were about half a percent.
Taking a look at the US, where the S&P 500 index is down just over 1%.
All right, we are back with David Sekera for Morningstar Research, take your questions about US stocks. We will start with the first question.
What is the outlook for Apple?
>> Yeah, I think this is an instance where you need to separate the company from the stock. We look at Apple itself, we think it's a very high quality company. We rated with a wide economic mode which means we think it has long-term durable competitive advantages. The company will be able to earn excess returns over invested capital as compared to its weighted average cost of capital for at least the next 20 years.
It's interesting looking at the stock price here. Apple stock has rallied since its developers conference and it rolled out its plans for artificial intelligence.
Our equity analyst team left there fair value equity unchanged following the conference.
I would say we just don't think that there is anything that has changed like the long term fundamental assumptions here so in our opinion, the market might be getting ahead of itself in the short term.
>> Okay. Good perspective there. We'll go to the next question, this is about Palantir.
Your thoughts on Palantir?
>> It's almost similar. From a business perspective, we do assign the company-- we think it has long-term durable competitive advantages. We are only pricing in this excess returns for the next 10 years.
We look at it having a pretty strong switching cost as well as they have great intellectual property on artificial intelligence. We think the platform is our leader for leveraging the power of AI, but this is a very volatile stock. We rate the stock with a very high uncertainty rating.
That is our highest uncertainty rating other than extreme. That means we do expect that there could be a pretty wide range of outcomes over time. In fact, over the past year, the stock has run up from his slows all the way up to its post-IPO highs so this is one for investors I would recommend make sure you size your positions correctly depending on your own risk tolerance and investment objectives.
>> Okay. Let's go to the next question.
This is on biotech. What is your take on the biotech sector? We have heard about some strengths in healthcare stocks. What about biotech?
>> Biotech is one of those sectors where you really need to do your homework on each one of the individual stocks. I think it's really hard to be able to just buy and sell the entire sector because each of the individual stocks can have a really wide range of outcomes based on their own characteristics. For example, some of these companies might be relatively small, they might only have single drugs in trials or may be only a couple of drugs at trial so depending on how those trials go, you could have a really big swing in the valuation of those underlying companies so again, I think you need to size those based on your own risk tolerance and investment objectives but for investors that want to invest in biotech That have lower your risk tolerance, I was a look at stocks like Amgen, Biogen and Gilead, each of those companies re-rate with either a wide or narrow economic mode. They already have a number of different existing drugs that they are selling, they have well-established research and develop an pipeline so I think I would actually recommend using the Morningstar Research, take a look at those companies but again, they are still risky but less so than those that only have one or two drugs in trials.
>> What is your view on the healthcare sector as a whole? We have seen this rotation out of some of these big stocks and healthcare seems like a defensive play.
>> Healthcare, there's a couple of different things going on there. Overall, the sector is probably pretty fairly valued but underneath I would say a lot of the stocks are barbel shaped. We have a couple of stocks that we think are significantly overvalued. Some of the stocks that are in somatic trades like Eli Lilly and Novo Nordisk, those are stocks that they have those GLP-1 weight loss drugs that were originally used for diabetes, we think those stocks are pricing into much growth for too long at this point I would be very careful with those. To the downside, there's a lot of healthcare stocks especially in devices that have really like the market that we think have good tailwinds behind them such as the aging baby boomers demographic. I think this would be more interesting for investors to take a look at today.
>> As always, make sure you do your own research before making any investment decisions.
We will get back to your questions on US equities for David Sekera in just a moment's time. And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get to today's educational segment.
There are different order types available on web broker. Jason Hnatyk, Senior client education instructor with TD Direct Investing has this look at how conditional orders work.
>> It's great to be here, as always.
Always excited to talk about orders on web broker and we are going to talk about conditional orders here and more specifically the one triggers another or OTA. Conditional orders can be very useful. There are two things that I think jumped out to show how versatile they can be for investors. One is they allow you to automate the process a little bit.
You don't need to be at your computer, the market is always going to continue to move. But you can set up a sequence of events to take place that you are always kind of at the wheel even if you might not be at your computer and second of all, they really can help an investor implement their trading plan, whether or not that's to capture gains or limit losses and by doing that, what I have found is that can help investors take emotion out of their trading and that can be important. It was jump into a broker so we can take a look at how we can implement OTA orders in our trading process. I am on the trading strategies page.
We are going to come back to this when we process an order in just a second. We are going to be focusing on the one triggers another which is all the way over here on the left-hand side. This little diagram and description available on this page do a great job of telling us all about this really useful order type. The order in itself is effectively, it's two orders: you have a first order that only one that first order executes will it trigger a secondary order to become active in the market.
Two common use cases for OTA's, one would be to enter an order to buy a position and then your secondary order could be something you would use to maybe take profits or to limit your losses.
So you are implementing that trading plan, as I mentioned. Or secondarily, some people use OTA orders to rebalance the portfolio's. Your first order could be selling out of a particular position that you own and your secondary order might be shifting and moving over and moving into another long position.
I want to highlight at the bottom of this screen, we put in a link to one of our videos all about conditional orders so you will be able to fact check and go back and seal of the nice needs no bits of information about the other conditional orders as well.
I've got a chart just appear on the screen for everybody.
This green line that I want to highlight for everybody, that would be order one for us. This would be our proposed limit order to buy a particular security.
If and when this order fails, a secondary order would then be put into place. I'm gonna highlight above this line just to kind of visualize this.
Maybe we will say this is 520 for arguments sake and we can imagine a secondary line on this chart up around 530, that can be our second order to take our profit if we are right and we guess that this particular investment is going to go up, we can be repaired to capture those profits even if we are not at our desk. Let's places order and I can show you how easily that can be executed as well. At the top of the screen, we are going to click on the buy sell button, these two arrows. Once I select that, I need to go to the strategies tab at the top of the screen. From here, we are back to the opening graphically show.
We are going to choose one here is another.
We've got to order entry tickets and we need to fill them both. Nothing different, just entering both trades. Let's choose that symbol that we had earlier on our chart to keep things consistent. We will keep our order as a long by order and I want to keep that price just as we had in our example, but we are when you keep it at $520. If the stock comes down to our price, we will be in place to buy where we may see value.
I'm gonna change our good till, I'm gonna make that good till cancelled.
I will explain why after we entered our second order. We are when you click on the bottom portion of the screen which will bring up the secondary order. You can see where it says OTA. Our first order is our primary and this is the secondary order that will take place if and when the first order fails. Let's keep it the same and flip our action over to sell. Quantity from the first orders when remain the same. In this case, we are going to keep the price type the same. At limit, you have other choices available to yourself and this is going to be our profit-taking order. Back to the good till section just a highlight for everybody, when you are using any conditional order, the good till time enforcement selections need to be identical for both sides of the order.
Canadian orders good till cancel will be 90 days in US orders are going to be good for 180 days. It's as simple as that.
That's our OTA order, it allows us to implement our trading plan and be prepared for what the market is going to throw at us.
>> Our thanks to Jason Hnatyk, Senior client education instructor at TD Direct Investing.
And for more educational resources, you can check out the learning centre on web broker or use this QR code to navigate to TD Direct Investing to two page where there are more informative videos.
Now before you get back to your questions about US equities for David Sekera, a reminder of how you can get in touch with us.
>> Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
>> Okay, we are back with David Sekera from Morningstar Research taking your questions about US equities. We will go to the next question.
Is Dell worth a look?
The US computer company.
>> Yeah, I would be very careful with Dell stock myself. When I look at Dell, their primary business is enterprise hardware, things like PCs, laptops, monitors, servers and so forth and, granted, they have a pretty high market share but hardware is just economically cyclical and mainly a commodity type product, so pretty low-margin. I think Dell stock has been caught up in this AI bubble. They do have some products which get sold into the really fast-growing data centres.
The data centres are being built, that's where all the AI is going to be generated.
However, while that portion of their business is growing, we just don't think it's a large enough portion really to make a difference in the valuation, in our opinion. So if I take a look at our expectations here, we are only projecting topline growth on a compound annual growth basis of a little over 4% for the next five years, forecasting earnings-per-share growth of only 10.9, call at 11%. That stock is trading at 19 times earnings so I think that's when you really need to focus on just how much you think that AI portion of the business really can grow over the next couple of years.
>> Do you see this AI height that has really led to the strong markets this year, so far this year, do you see that dying down or do you see that momentum continuing potentially?
>> It's always really hard to know. We are at a pretty high valuation when we look at all of our AI stocks. They are all, for the most part, in that three-star range, a couple of them are starting to get towards to star range, so they are getting ahead of what we think the long-term intrinsic valuations are. But of course, when you look at the markets, things can stay overvalued or even get more overvalued in the short term but I do think for investors, you need to take a look at your portfolio, look at the stocks that are getting to be overvalued, overextended, even if you don't want to fully sell out of a position, may be trim it a little bit here and there.
There is the old adage, no one ever went broke taking a profit.
>> Earnings will be coming out so we will be hearing more about that as well. Going to the next question, which is pretty timely, this is on gold.
What is your view on gold and gold miners?
Of course, gold has seen some record prices recently. What are your thoughts?
>> The gold miners look like they've had a pretty good rise here over the past couple of months but even after that rise, I think a lot of them still look pretty interesting. This is a situation where we have a pretty bearish view on gold. Our long-term price target when you look at the supply demand dynamics as well as the cost for mining and producing gold, our long-term price targets are somewhere in the $1800 range, so a lot lower than where it is now, but even with that very few, a number of these miners still look undervalued to us and what I really like it here is that I think there's a lot of upside leverage. If gold were to stay here or move higher, I think there's a lot of earnings growth that we could see.
The gold mining industry has a lot of different risks. Gold prices were to fall more than expected, that could suddenly put a lot of pressure here. A lot of the miners are located in jurisdictions where you can have political risk, labour disruptions, maybe tariffs, governments trying to take over the mines, so a lot of different idiosyncratic risk here than what you see in other sectors. There is always the risk that maybe there is less gold in the ground than what they are currently expecting. Of course, you could always run into unexpected geological conditions that could make it more expensive to mine or process gold ore but from my perspective, and I think it's a really interesting opportunity with some potential upside.
>> Do you see any potential tailwinds for rate cuts that could see gold prices continuing to run or do you think that's kind of pricing already?
>> In the short term, it's probably already priced in at this point and really it's much more about the real interest rate than the nominal interest rate that is going to impact the gold prices. Again, as long-term investors, we are not necessarily trying to pick the highs and lows for gold prices.
We are really looking out over the next five years, where do we expect gold prices to go to? That is going to be based on the analysis we did on that supply demand curve of gold and looking at the cost of gold and gold processing so that's why we have that bearish view on gold prices.
>> Okay. Let's go to the next question.
Any big takeaways from the US bank earnings season so far?
>> I think the big take away here is that there wasn't a big take away this quarter.
Generally, when I look at the banks and look at our equity analysts write ups, I would say they are mostly in line with expectations. When I look at some of the things that I focus on like loan-loss reserves, generally in line. It does not appear that the banks are preparing for any kind of near-term recession. There are increases in delinquency rates but really no big spike up so well that is something we are watching closely, it's not necessarily a concern to us just yet and then net interest income is holding up relatively well and the big thing that we saw this quarter is that the banks did very well as far as nonbanking activities so made a lot of profit in investment banking, trading, other things like that.
But generally I think when megabanks are fairly valued, getting to be slightly overvalued in some cases, it to some degree, the market might just be pricing into much of that nonbanking revenue growth for too long.
>> What about the regional banks in the US? Where do you see evaluations stacking up perhaps against the larger US banks?
>> We still see a lot of value in the regional banks. Those banks really took a hard hit last year after the bankruptcy of Silicon Valley Bank and a couple of other banks and people were very concerned about their portfolios and taking a lot of losses as interest rates are going up. Of course, interest rates have stabilized and come back down so a lot of those losses in the hold to maturity counts should have stabilized if not come down so when looking at the banking sector, looking for new opportunities, I see a lot more value in those regional banks and we see in the megabanks.
>> Okay. We will get back to your questions for David Sekera on US equities in just a moment.
As always, make sure you do your own research before making any investment decisions.
and a reminder that you can get in touch with us at any time.
>> Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
The TD Direct Investing Index of the month of June has been released and self-directed investor sentiment remained in neutral. Here are the details. Let's start with the overall TD Direct Investing Index, which measures sentiment in a range from -100 for very bearish to +100 for very bullish.
DII sentiment settled at -5 for June, down a single point from the previous month.
Stockmarkets gained ground last month and for the first half of 2024.
When we compare sentiment to June of last year, the big drop in sentiment was that +19.
Looking at the components that make up the DII, into proxies helped us better understand why sentiment slipped marginally in June. One was net equity demand or bought versus sold. It came in at -9, that's down three points month of her mother, indicating self-directed investors sold more securities last month.
A positive value would indicate investors bought more than they sold. Secondly, flight to safety or risk appetite from investors as you can see was -4, that's four points lower than last month, meaning more investors pulled back to safer, less risky investments.
More positive value means risk on or less actual flight to safety.
A few key points that stood out. Number one, technology was the big winner for a second month in a row.
Secondly, Gen Z and Milennials born 1981 and after were once again the most optimistic age group but they remained in neutral territory. Technology remained the most heavily traded sector with sentiments at +14, up month over month. The ranking of heavily about stocks and technology were little changed in June, the top stocks being Nvidia, Shopify, Apple, supermicro computer and AMD. Sentiment for Gen Z and Milennials edge up to points month over month to +4 in June. Heavily bought stocks by the youngest investors included Nvidia, Apple and Tesla.
And that's your TD Direct Investing highlights for June 2024.
[music] We are having a look at TD's Advanced Dashboard, platform designed for active traders available through TD Direct Investing. We are looking at the heat map function which gives you a view of the market movers. We see TC pipelines is up, Enbridge is also seeing some green on the screen. Suncor as well. That's also seeing some bids today. Moving to the right, technology, we are seeing a big selloff in tech names and that continues to intensify. We will look at the S&P 100, see what's happening on the US side of the border.
We mentioned that selloff in ship names.
Many of the chip leaders like Nvidia, AMD are down quite a bit. Apple as well is also seeing some weakness there.
We are seeing cooling in consumer names, weakness and Tesla and Amazon.
All right, we are back now with David Sekera from Morningstar Research.
For the next question, this is on Intel.
What are your thoughts on Intel, chipmaker Intel?
>> You know, Intel, I would actually be pretty cautious with this one.
Fundamentally, we think it fell behind the curve in the upgrade cycle compared to its competitors in the semiconductor space.
The company now has to spend pretty high mountain in Spending to just be able to catch up to the competition, much less trying to get back to a leading position, and taking a look at their AI, we just don't necessarily see them being a strong competitor in artificial intelligence anytime soon in the near term. We think probably AMD is more likely to be that number two competitor behind Nvidia.
Personally, I would be very cautious with Nvidia and make sure you really understand where they are in that upgrade cycle fundamentally.
>> Okay. Next question is on earnings.
What's your general outlook for upcoming US earnings?
>> I need to break that into two answers.
Earnings in and of themselves probably are going to be just fine. I expect your normal percentage of companies will meet, some will end up missing. When I look at the economy in the US over the second quarter, really nothing is different than what we were expecting so I think earnings, on a trailing basis, will be just fine.
So my concern really is going to be on the guidance that management companies give.
One thing that we have seen here anecdotally is a reduction in spending by middle income consumers.
Middle income consumers had held up pretty well for the last year and 1/2. We are starting to see cracks with the middle income consumers so my concern would be, what I would really listen for in earnings, we are already expecting an economic slowdown but if the economy is slowing, may be more than what we are necessarily seeing at this point, and management team start reducing guidance with the market trading what we consider to be in an overvalued area, if that happens, I'm very concerned that there could be downside pressure.
>> Okay.
Let's go to the next question on energy.
Can we get David's thoughts on the energy sector?
>> I find the energy sector right now very interesting.
Just from a portfolio perspective, I think it provides just a really good, natural hedge in your portfolio against if inflation were to start rising or be higher for longer.
It's a good natural hedge in your portfolio for any additional geopolitical risks. I also find it interesting because long term, we have a pretty bearish view on the price of oil. Mid economic cycle, West Texas intermediate, we are only looking for $55 a barrel, that's well below where we are now. My look at our long-term supply demand curves, we expect demand to start declining later this decade, you will just have a higher perspective of autos on the road being either battery electric vehicles or hybrids. Even with that very few, a lot of the energy companies model to be pretty undervalued in our view. I think there's probably too much negative sentiment in the marketplace right now. Of course, the downside to be of oil prices fall further than what we expect or maybe if demand is less than what we expect and oil is another one of those sectors where you do have pretty good idiosyncratic risk. A lot of the oil producers are in riskier political jurisdictions, it could always potentially be nationalized with some of those companies, you can always see tariffs or maybe geological conditions could make it more expensive to extract that will from the ground. But even including a lot of those risks, I see a lot of opportunities for investors there.
>> Okay. Move to the next question. How are airlines looking in this environment?
We are in the summertime, peak season.
What are your thoughts?
>> Over the past two years, the airlines really have had the benefit from all that pent up demand for travel from the pandemic. The summer travel season, as you mentioned, is still running pretty strong and most people are looking for that over the short term. However, our economics team and our analysts are starting to see some indications that travel spending may start to normalize over the next 12 to 18 months so I would be pretty careful of the airlines. We think that their valuations are still pricing in a relatively high growth rate for travel whereas we think consumer spending is coming under increasing pressure. We are looking for the rate of the economy to slow.
In that, we do expect that the growth rates for travel will probably drop down towards more normalized historical averages than the strong growth that we have seen over the past two years.
>> Before we let you go, your general thoughts on what investors should be thinking about as we head into the second half of the year?
>> Taking a second look at your portfolio, taking a look at your allocations, taking a look at the kind of risks that you have in your portfolio.
Make sure that you're comfortable with those risks, with the market being overvalued, again, he can stay overvalued but again, once we start taking a selloff, I wouldn't be surprised to see the market taking a sharp correction. It's always hard to know when so make sure that your portfolio can withstand that kind of volatility and that you do you have the risk tolerance to ride that out. If you don't, I think now is a great time to start taking a little profit off the table and get to those allocations that your personal risk tolerance can handle.
>> David, great information, as always.
Thank you very much for joining us.
>> Thank you.
>> Our thanks to David Sekera, chief US market strategist with Morningstar Research.
As always, make sure you do your own research before making any investment decisions.
if we didn't have time to get your question today, we will aim to get it into future shows.
Stay tuned. On Thursday show, Hussein Allidina, head of commodities at TD Asset Management will be our guest taking your questions about commodities.
And a reminder that you can get a head start.
Just email MoneyTalkLive@TD.com.
That's all for our show today. Take care.
[theme music]
Every day, I'll be joined by guests from across TD and beyond, many of whom you'll only see here.
We're going to take you through what's moving the markets and answer your questions about investing.
Coming up on today show, we will discuss whether valuations are looking stretched as the US continues to hit record highs with David Sekera from Morningstar Research. We will also have a look at the latest TD Direct Investing investor sentiment index. And in today's WebBroker education segment, Jason Hnatyk will show us how you can make conditional orders using the platform.
And here's how you get in touch with us.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
And before you get our Guest today, let's get you an update on the markets.
We will start here in Canada with Canada's main stock index, it opened lower as the rotation out of mega-cap tech winners continued on Wall Street. We are seeing gains in oil and defensive shares that are helping to limit overall market losses.
Currently the TSX is down 111 points were about half a percent.
Turning to look at some of the big movers, West Fraser Timber, shares of the Canadian lumber company is getting a bit today.
There's been no bounce back from a year and 1/2 low with that we reached on July 15. What has fuelled that is increased demand expectations for wood and construction materials in major economies.
Shares of West Fraser Timber currently trading up, let's get that on the screen here, it's up just over 3%.
Some other big movers today, of course, shares of Shopify are under pressure again. We are seeing that rotation of some of the big tech names and Shopify getting caught up in some of that weakness. Shares of Shopify right now are down just over 6 1/2%.
All right, let's turn to Wall Street which also opens lower amid the slump in technology stocks. Currently the broad-based S&P 500 is trading down the 67 points or just over 1%.
Again, that selloff in technology is hitting the tech heavy NASDAQ compensated which is also trading lower.
It is down almost 2 1/2%, about 450 points at this moment.
Again, we talked about that rotation out of some of the big tech winners. One of the stocks that is being impacted, of course, is chipmaker and video.
This is offering the latest sign of investors pulling back on mega-cap tech after a monster on this year. The stock is currently down to the tune of almost 5.8%, more than seven points. And that is your market update.
Well, US markets have hit new record highs in recent trading sessions as the big tech names continue to push higher, but are valuations beginning to look stretched?
Joining us now discusses David Sekera, chief US market strategist with Morningstar Research.
David, thanks for being with us today.
>> Of course. Good afternoon. Always good to see you, Anthony.
>> You too. Let's start with market valuations which are looking stretched after the big run we have had. What are your thoughts?
>> According to our evaluations, at this point, they are not only stretched but the market in the US is starting to trade pretty far into overvalued territory. When I look at the market valuation, it's trading at a six or 7% premium to a composite of our fair values. Let me explain a little bit how we look at the market versus what you may hear from other strategists. We cover over 700 stocks to trade in the US what we do is put together a composite, the intrinsic valuation of all of those companies as determined by our equity analyst team using a fundamental, bottoms up analysis, and then compare that to where they are trading in the marketplace and when we look at that today, that's how we get the price to fair value showing that 67% premium. I have to say, this is pretty rare territory that we are in.
If I look back to 2010, the markets only traded at this much of a premium or more only 1% of the time.
The last time the market was getting to be this far overvalued was at the end of 2021, when we are entering 2022. When I think about the market right now, even though the market is pretty far overvalued, it's always tough to know when we are going to see that correction. I do think there is a possibility where we could be in one of those markets where it could stay overvalued for a while, similar to 2021, until there is a reason for it to correct.
So I do think now is a good time for investors to review your asset allocations. If your equity allocation has run up to far over your targeted percentage, now might be a pretty good time to lock in some profits, sell a little bit of that down and get back towards your long-term targeted allocations.
>> Yeah, it looks like we are seeing a bit of that rotation happening in the markets of the last couple of days. Now, we have surpassed the former highs that we saw in 2022. How do current conditions differ from that?
>> In our 2022 Outlook, we noted that at that point in time, we thought stocks are overvalued and investors should have been underweight in equity at that point in time. When I look at the conditions now versus then, they are actually pretty different. In the beginning of 2022 in our annual outlet, we noted that there were four main headwinds that the market was going to have to contend with back then.
We were projecting inflation increase, we were forecasting long-term interest rates to increase, we expected the Fed to start tightening monetary policy and our US economic steam is forecasting the US economy to slow. All of that came to fruition in 2022.
Stocks plunged, but the market did with the market always does, it acted like a pendulum and it swung out too far to the downside. But since bottoming out at the end of October 2022 when the bottom hit, we are now starting to those new highs.
What is different now? Well, three of those for same headwinds are still tailwinds. Inflation, we expect to continue to keep moderating to the rest of this year going into next year. Our US economic steam is predicting long-term interest rates to be on a multiyear decline and we expect the Fed to start easing monetary policy with a cut as soon as the September meeting so really the only had when we have right now is the slowing rate of economic growth. Having said that, our US economic steam is in the soft landing camper we are looking for growth to slow but not looking for a recession.
>> Okay. Of course, the AI demand trend has been a huge component. Can stocks like Nvidia go much higher?
>> That's always hard to say. Fully to overvalued stock can always become more overvalued in the short term before it corrects.
Specifically looking at AI stocks and even more specifically looking at Nvidia, I know our analyst team expects that there is at least four more quarters of similar high growth rates that we have seen over the past couple of quarters. Demand for their artificial intelligence DP use remains extraordinarily high but there are supply constraints. Right now, they can sell everything they can make at whatever price they want. However, I do think the stock probably prices that in and maybe even more. Let me explain. Last year's revenue doubled from the prior year and came in at 60 billion. Our model forecast revenue to double again up to 126 billion for this fiscal year and looking at our model, we expected to grow all the way to 235,000,000,000 x 20 29.
Over that same time period, we are looking for margins to expand and get to new highs. We are looking for earnings growth to get to $2.80 per share this year, going all the way to $5.24 in 2029. That stock is trading at 43 times this year's earnings. In fact, it is trading at 23×2029 earnings.
The key to watch for with Nvidia and a lot of the AI stocks is the guidance from their largest customers.
Specifically, we will be listening to the Spending programs from companies such as Microsoft, Alphabet, Amazon, those are some of the largest buyers of those chips, really to start listening for when they start slowing there Spending, especially if they are going to slow on AI and if that happens, in my opinion, I think Nvidia's stock could be at risk of tamping down.
>> Are you seeing signs of that Exponentially slowing down this year?
>> Not yet. At this point, talking to our equity analyst team, they are looking for another four quarters of that same kind of growth that we have seen in the past couple of quarters so it could be another year where we are looking at that growth but based on where that stock is valued, I think that amount of growth is already priced in.
>> Okay. Great perspective. Again, we have talked a little bit about this rotation out of some of these big Stocks it to some of these sort of average stocks and small caps. Walk us through why small caps and value stocks look interesting right now.
>> In addition to calculating a price to fair value for the broad market, you would also break that down into the component parts using the MorningStar style box. So we will break it down into capitalization, into different styles like value and growth, and when I look at our price to fair value for small-cap and value stocks, small caps specifically it is on a relative value basis are trading at some of their most undervalued levels that we have seen since 2010 and even value stocks are trading at pretty undervalued levels as compared to the market so what I think the market is starting to price in right now in this rotation we have seen over the past week or so, historically, small-cap stocks have performed pretty well when interest rates are falling in combination with the Fed easing monetary policy and to some degree with AI stocks taking all the oxygen in the market over the past year and 1/2, value stocks have gone left too far behind and I think there is that rotation coming out of growth into value.
>> Okay. Besides value and small-cap, what other areas in the market look interesting to you right now?
>> We also break our evaluation standby sector and the three sectors that I think I see the most opportunities in value is going to be real estate, energy and basic materials.
So real estate, of course, it's still the most hated asset class on Wall Street.
Personally, I would still steer clear of urban office space. It models undervalued but at the same point in time, there could be more downside risk before it bottoms out. But we do see a lot of value for investors in real estate that has a defensive characteristic.
Thinking about healthcare, medical offices, life sciences, things like that.
When I take a look at the energy sector, I think that's pretty interesting. We actually have a relatively bearish view on the price of oil. We are looking for a midcycle price of oil to be $55 per barrel for West Texas intermediate but energy stocks generally look pretty attractive even with that bearish view so if oil were to stay here or move higher, I do think there's a lot of upside leverage in the energy sector. Lastly, the basic materials has a lot of really interesting opportunities, a lot of them are very idiosyncratic, specifically areas where the pandemic had led to an increase in food consumption but then we had all those transportation bottlenecks in 2022, that played havoc with supply chains. So what happened was due to that excess demand from the pandemic in 2020 and 2021, a lot of the companies then over ordered in 2022 and what happened is when all of that came in, they had too much inventory and had to pare it back in 2023 so earnings I think were artificially depressed last year. We think that generally the destocking is coming to an end and this year we are looking for more normalize growth patterns going forward. Two areas that look particularly interesting to us would include manufacturers of food additives as well as manufacturers of potash.
>> Great start to the conversation. We will get to your questions about US equities for David Sekera in just a moment. And a reminder that you can get in touch with us at any time.
Just email moneytalklive@td.com or fill out the viewer response box under the video player on WebBroker.
Now, here's an update on the top stories in the business world today and look at how the markets are trading.
Shares of chipmakers are in the spotlight amid reports the Biden administration was considering severe trade restrictions as part of a chip clamped down against China.
According to Bloomberg, the US has floated the idea of using a strict export measure called the foreign direct product rule, which could severely limit firms like Dutch chip firm ASML and Japan's Tokyo electron from selling the product to China. Amplifying the worries, former US President Donald Trump told Bloomberg business week that Taiwan should pay the US for its defence, which wait on shares of Taiwan chip making giant TSMC. On the earnings front, healthcare giant Johnson & Johnson topped Wall Street estimates for second-quarter profit and revenue, driven by strong sales of its drugs including cancer treatment Darzalex and a blockbuster psoriasis drug Stelara.
While drug sales came in slightly ahead of estimates and medical device revenue fell a bit short, spending on research and develop it was about 15% below expectations.
Shares of J&J have struggled this year amid concerns over his anti-inflammatory blockbuster drug Stelara which will soon face lower price competition, as well as ongoing litigation over the Talc lawsuits.
Johnson & Johnson is up over 3%.
In more earnings news, US tracking firm J.B. Hunt Transport Services reported 24% drop in second-quarter profit amid weakness in their truckload and intermodal businesses.
Operating income fell 31% in the intermodal segment on higher wage costs for both driver and non-driver.
Also weighing on income was underutilized equipment ownership expenses, increased spending on maintenance and higher costs for insurance and claims compared to revenue.
And here's how the main benchmark index in Canada is trading.
Right now, the S&P TSX is down to the tune of 123 points were about half a percent.
Taking a look at the US, where the S&P 500 index is down just over 1%.
All right, we are back with David Sekera for Morningstar Research, take your questions about US stocks. We will start with the first question.
What is the outlook for Apple?
>> Yeah, I think this is an instance where you need to separate the company from the stock. We look at Apple itself, we think it's a very high quality company. We rated with a wide economic mode which means we think it has long-term durable competitive advantages. The company will be able to earn excess returns over invested capital as compared to its weighted average cost of capital for at least the next 20 years.
It's interesting looking at the stock price here. Apple stock has rallied since its developers conference and it rolled out its plans for artificial intelligence.
Our equity analyst team left there fair value equity unchanged following the conference.
I would say we just don't think that there is anything that has changed like the long term fundamental assumptions here so in our opinion, the market might be getting ahead of itself in the short term.
>> Okay. Good perspective there. We'll go to the next question, this is about Palantir.
Your thoughts on Palantir?
>> It's almost similar. From a business perspective, we do assign the company-- we think it has long-term durable competitive advantages. We are only pricing in this excess returns for the next 10 years.
We look at it having a pretty strong switching cost as well as they have great intellectual property on artificial intelligence. We think the platform is our leader for leveraging the power of AI, but this is a very volatile stock. We rate the stock with a very high uncertainty rating.
That is our highest uncertainty rating other than extreme. That means we do expect that there could be a pretty wide range of outcomes over time. In fact, over the past year, the stock has run up from his slows all the way up to its post-IPO highs so this is one for investors I would recommend make sure you size your positions correctly depending on your own risk tolerance and investment objectives.
>> Okay. Let's go to the next question.
This is on biotech. What is your take on the biotech sector? We have heard about some strengths in healthcare stocks. What about biotech?
>> Biotech is one of those sectors where you really need to do your homework on each one of the individual stocks. I think it's really hard to be able to just buy and sell the entire sector because each of the individual stocks can have a really wide range of outcomes based on their own characteristics. For example, some of these companies might be relatively small, they might only have single drugs in trials or may be only a couple of drugs at trial so depending on how those trials go, you could have a really big swing in the valuation of those underlying companies so again, I think you need to size those based on your own risk tolerance and investment objectives but for investors that want to invest in biotech That have lower your risk tolerance, I was a look at stocks like Amgen, Biogen and Gilead, each of those companies re-rate with either a wide or narrow economic mode. They already have a number of different existing drugs that they are selling, they have well-established research and develop an pipeline so I think I would actually recommend using the Morningstar Research, take a look at those companies but again, they are still risky but less so than those that only have one or two drugs in trials.
>> What is your view on the healthcare sector as a whole? We have seen this rotation out of some of these big stocks and healthcare seems like a defensive play.
>> Healthcare, there's a couple of different things going on there. Overall, the sector is probably pretty fairly valued but underneath I would say a lot of the stocks are barbel shaped. We have a couple of stocks that we think are significantly overvalued. Some of the stocks that are in somatic trades like Eli Lilly and Novo Nordisk, those are stocks that they have those GLP-1 weight loss drugs that were originally used for diabetes, we think those stocks are pricing into much growth for too long at this point I would be very careful with those. To the downside, there's a lot of healthcare stocks especially in devices that have really like the market that we think have good tailwinds behind them such as the aging baby boomers demographic. I think this would be more interesting for investors to take a look at today.
>> As always, make sure you do your own research before making any investment decisions.
We will get back to your questions on US equities for David Sekera in just a moment's time. And a reminder that you can get in touch with us any time. Just email moneytalklive@td.com.
Now, let's get to today's educational segment.
There are different order types available on web broker. Jason Hnatyk, Senior client education instructor with TD Direct Investing has this look at how conditional orders work.
>> It's great to be here, as always.
Always excited to talk about orders on web broker and we are going to talk about conditional orders here and more specifically the one triggers another or OTA. Conditional orders can be very useful. There are two things that I think jumped out to show how versatile they can be for investors. One is they allow you to automate the process a little bit.
You don't need to be at your computer, the market is always going to continue to move. But you can set up a sequence of events to take place that you are always kind of at the wheel even if you might not be at your computer and second of all, they really can help an investor implement their trading plan, whether or not that's to capture gains or limit losses and by doing that, what I have found is that can help investors take emotion out of their trading and that can be important. It was jump into a broker so we can take a look at how we can implement OTA orders in our trading process. I am on the trading strategies page.
We are going to come back to this when we process an order in just a second. We are going to be focusing on the one triggers another which is all the way over here on the left-hand side. This little diagram and description available on this page do a great job of telling us all about this really useful order type. The order in itself is effectively, it's two orders: you have a first order that only one that first order executes will it trigger a secondary order to become active in the market.
Two common use cases for OTA's, one would be to enter an order to buy a position and then your secondary order could be something you would use to maybe take profits or to limit your losses.
So you are implementing that trading plan, as I mentioned. Or secondarily, some people use OTA orders to rebalance the portfolio's. Your first order could be selling out of a particular position that you own and your secondary order might be shifting and moving over and moving into another long position.
I want to highlight at the bottom of this screen, we put in a link to one of our videos all about conditional orders so you will be able to fact check and go back and seal of the nice needs no bits of information about the other conditional orders as well.
I've got a chart just appear on the screen for everybody.
This green line that I want to highlight for everybody, that would be order one for us. This would be our proposed limit order to buy a particular security.
If and when this order fails, a secondary order would then be put into place. I'm gonna highlight above this line just to kind of visualize this.
Maybe we will say this is 520 for arguments sake and we can imagine a secondary line on this chart up around 530, that can be our second order to take our profit if we are right and we guess that this particular investment is going to go up, we can be repaired to capture those profits even if we are not at our desk. Let's places order and I can show you how easily that can be executed as well. At the top of the screen, we are going to click on the buy sell button, these two arrows. Once I select that, I need to go to the strategies tab at the top of the screen. From here, we are back to the opening graphically show.
We are going to choose one here is another.
We've got to order entry tickets and we need to fill them both. Nothing different, just entering both trades. Let's choose that symbol that we had earlier on our chart to keep things consistent. We will keep our order as a long by order and I want to keep that price just as we had in our example, but we are when you keep it at $520. If the stock comes down to our price, we will be in place to buy where we may see value.
I'm gonna change our good till, I'm gonna make that good till cancelled.
I will explain why after we entered our second order. We are when you click on the bottom portion of the screen which will bring up the secondary order. You can see where it says OTA. Our first order is our primary and this is the secondary order that will take place if and when the first order fails. Let's keep it the same and flip our action over to sell. Quantity from the first orders when remain the same. In this case, we are going to keep the price type the same. At limit, you have other choices available to yourself and this is going to be our profit-taking order. Back to the good till section just a highlight for everybody, when you are using any conditional order, the good till time enforcement selections need to be identical for both sides of the order.
Canadian orders good till cancel will be 90 days in US orders are going to be good for 180 days. It's as simple as that.
That's our OTA order, it allows us to implement our trading plan and be prepared for what the market is going to throw at us.
>> Our thanks to Jason Hnatyk, Senior client education instructor at TD Direct Investing.
And for more educational resources, you can check out the learning centre on web broker or use this QR code to navigate to TD Direct Investing to two page where there are more informative videos.
Now before you get back to your questions about US equities for David Sekera, a reminder of how you can get in touch with us.
>> Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
You can send us an email anytime at moneytalklive@td.com or you can use the question box right below the screen here on WebBroker. Just write in your question and hit send.
We'll see if one of our guests can get you the answer right here at MoneyTalk Live.
>> Okay, we are back with David Sekera from Morningstar Research taking your questions about US equities. We will go to the next question.
Is Dell worth a look?
The US computer company.
>> Yeah, I would be very careful with Dell stock myself. When I look at Dell, their primary business is enterprise hardware, things like PCs, laptops, monitors, servers and so forth and, granted, they have a pretty high market share but hardware is just economically cyclical and mainly a commodity type product, so pretty low-margin. I think Dell stock has been caught up in this AI bubble. They do have some products which get sold into the really fast-growing data centres.
The data centres are being built, that's where all the AI is going to be generated.
However, while that portion of their business is growing, we just don't think it's a large enough portion really to make a difference in the valuation, in our opinion. So if I take a look at our expectations here, we are only projecting topline growth on a compound annual growth basis of a little over 4% for the next five years, forecasting earnings-per-share growth of only 10.9, call at 11%. That stock is trading at 19 times earnings so I think that's when you really need to focus on just how much you think that AI portion of the business really can grow over the next couple of years.
>> Do you see this AI height that has really led to the strong markets this year, so far this year, do you see that dying down or do you see that momentum continuing potentially?
>> It's always really hard to know. We are at a pretty high valuation when we look at all of our AI stocks. They are all, for the most part, in that three-star range, a couple of them are starting to get towards to star range, so they are getting ahead of what we think the long-term intrinsic valuations are. But of course, when you look at the markets, things can stay overvalued or even get more overvalued in the short term but I do think for investors, you need to take a look at your portfolio, look at the stocks that are getting to be overvalued, overextended, even if you don't want to fully sell out of a position, may be trim it a little bit here and there.
There is the old adage, no one ever went broke taking a profit.
>> Earnings will be coming out so we will be hearing more about that as well. Going to the next question, which is pretty timely, this is on gold.
What is your view on gold and gold miners?
Of course, gold has seen some record prices recently. What are your thoughts?
>> The gold miners look like they've had a pretty good rise here over the past couple of months but even after that rise, I think a lot of them still look pretty interesting. This is a situation where we have a pretty bearish view on gold. Our long-term price target when you look at the supply demand dynamics as well as the cost for mining and producing gold, our long-term price targets are somewhere in the $1800 range, so a lot lower than where it is now, but even with that very few, a number of these miners still look undervalued to us and what I really like it here is that I think there's a lot of upside leverage. If gold were to stay here or move higher, I think there's a lot of earnings growth that we could see.
The gold mining industry has a lot of different risks. Gold prices were to fall more than expected, that could suddenly put a lot of pressure here. A lot of the miners are located in jurisdictions where you can have political risk, labour disruptions, maybe tariffs, governments trying to take over the mines, so a lot of different idiosyncratic risk here than what you see in other sectors. There is always the risk that maybe there is less gold in the ground than what they are currently expecting. Of course, you could always run into unexpected geological conditions that could make it more expensive to mine or process gold ore but from my perspective, and I think it's a really interesting opportunity with some potential upside.
>> Do you see any potential tailwinds for rate cuts that could see gold prices continuing to run or do you think that's kind of pricing already?
>> In the short term, it's probably already priced in at this point and really it's much more about the real interest rate than the nominal interest rate that is going to impact the gold prices. Again, as long-term investors, we are not necessarily trying to pick the highs and lows for gold prices.
We are really looking out over the next five years, where do we expect gold prices to go to? That is going to be based on the analysis we did on that supply demand curve of gold and looking at the cost of gold and gold processing so that's why we have that bearish view on gold prices.
>> Okay. Let's go to the next question.
Any big takeaways from the US bank earnings season so far?
>> I think the big take away here is that there wasn't a big take away this quarter.
Generally, when I look at the banks and look at our equity analysts write ups, I would say they are mostly in line with expectations. When I look at some of the things that I focus on like loan-loss reserves, generally in line. It does not appear that the banks are preparing for any kind of near-term recession. There are increases in delinquency rates but really no big spike up so well that is something we are watching closely, it's not necessarily a concern to us just yet and then net interest income is holding up relatively well and the big thing that we saw this quarter is that the banks did very well as far as nonbanking activities so made a lot of profit in investment banking, trading, other things like that.
But generally I think when megabanks are fairly valued, getting to be slightly overvalued in some cases, it to some degree, the market might just be pricing into much of that nonbanking revenue growth for too long.
>> What about the regional banks in the US? Where do you see evaluations stacking up perhaps against the larger US banks?
>> We still see a lot of value in the regional banks. Those banks really took a hard hit last year after the bankruptcy of Silicon Valley Bank and a couple of other banks and people were very concerned about their portfolios and taking a lot of losses as interest rates are going up. Of course, interest rates have stabilized and come back down so a lot of those losses in the hold to maturity counts should have stabilized if not come down so when looking at the banking sector, looking for new opportunities, I see a lot more value in those regional banks and we see in the megabanks.
>> Okay. We will get back to your questions for David Sekera on US equities in just a moment.
As always, make sure you do your own research before making any investment decisions.
and a reminder that you can get in touch with us at any time.
>> Do you have a question about investing or what's driving the markets?
Our guests are eager to hear what's on your mind, so send us your questions.
There are two ways you can get in touch with us.
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The TD Direct Investing Index of the month of June has been released and self-directed investor sentiment remained in neutral. Here are the details. Let's start with the overall TD Direct Investing Index, which measures sentiment in a range from -100 for very bearish to +100 for very bullish.
DII sentiment settled at -5 for June, down a single point from the previous month.
Stockmarkets gained ground last month and for the first half of 2024.
When we compare sentiment to June of last year, the big drop in sentiment was that +19.
Looking at the components that make up the DII, into proxies helped us better understand why sentiment slipped marginally in June. One was net equity demand or bought versus sold. It came in at -9, that's down three points month of her mother, indicating self-directed investors sold more securities last month.
A positive value would indicate investors bought more than they sold. Secondly, flight to safety or risk appetite from investors as you can see was -4, that's four points lower than last month, meaning more investors pulled back to safer, less risky investments.
More positive value means risk on or less actual flight to safety.
A few key points that stood out. Number one, technology was the big winner for a second month in a row.
Secondly, Gen Z and Milennials born 1981 and after were once again the most optimistic age group but they remained in neutral territory. Technology remained the most heavily traded sector with sentiments at +14, up month over month. The ranking of heavily about stocks and technology were little changed in June, the top stocks being Nvidia, Shopify, Apple, supermicro computer and AMD. Sentiment for Gen Z and Milennials edge up to points month over month to +4 in June. Heavily bought stocks by the youngest investors included Nvidia, Apple and Tesla.
And that's your TD Direct Investing highlights for June 2024.
[music] We are having a look at TD's Advanced Dashboard, platform designed for active traders available through TD Direct Investing. We are looking at the heat map function which gives you a view of the market movers. We see TC pipelines is up, Enbridge is also seeing some green on the screen. Suncor as well. That's also seeing some bids today. Moving to the right, technology, we are seeing a big selloff in tech names and that continues to intensify. We will look at the S&P 100, see what's happening on the US side of the border.
We mentioned that selloff in ship names.
Many of the chip leaders like Nvidia, AMD are down quite a bit. Apple as well is also seeing some weakness there.
We are seeing cooling in consumer names, weakness and Tesla and Amazon.
All right, we are back now with David Sekera from Morningstar Research.
For the next question, this is on Intel.
What are your thoughts on Intel, chipmaker Intel?
>> You know, Intel, I would actually be pretty cautious with this one.
Fundamentally, we think it fell behind the curve in the upgrade cycle compared to its competitors in the semiconductor space.
The company now has to spend pretty high mountain in Spending to just be able to catch up to the competition, much less trying to get back to a leading position, and taking a look at their AI, we just don't necessarily see them being a strong competitor in artificial intelligence anytime soon in the near term. We think probably AMD is more likely to be that number two competitor behind Nvidia.
Personally, I would be very cautious with Nvidia and make sure you really understand where they are in that upgrade cycle fundamentally.
>> Okay. Next question is on earnings.
What's your general outlook for upcoming US earnings?
>> I need to break that into two answers.
Earnings in and of themselves probably are going to be just fine. I expect your normal percentage of companies will meet, some will end up missing. When I look at the economy in the US over the second quarter, really nothing is different than what we were expecting so I think earnings, on a trailing basis, will be just fine.
So my concern really is going to be on the guidance that management companies give.
One thing that we have seen here anecdotally is a reduction in spending by middle income consumers.
Middle income consumers had held up pretty well for the last year and 1/2. We are starting to see cracks with the middle income consumers so my concern would be, what I would really listen for in earnings, we are already expecting an economic slowdown but if the economy is slowing, may be more than what we are necessarily seeing at this point, and management team start reducing guidance with the market trading what we consider to be in an overvalued area, if that happens, I'm very concerned that there could be downside pressure.
>> Okay.
Let's go to the next question on energy.
Can we get David's thoughts on the energy sector?
>> I find the energy sector right now very interesting.
Just from a portfolio perspective, I think it provides just a really good, natural hedge in your portfolio against if inflation were to start rising or be higher for longer.
It's a good natural hedge in your portfolio for any additional geopolitical risks. I also find it interesting because long term, we have a pretty bearish view on the price of oil. Mid economic cycle, West Texas intermediate, we are only looking for $55 a barrel, that's well below where we are now. My look at our long-term supply demand curves, we expect demand to start declining later this decade, you will just have a higher perspective of autos on the road being either battery electric vehicles or hybrids. Even with that very few, a lot of the energy companies model to be pretty undervalued in our view. I think there's probably too much negative sentiment in the marketplace right now. Of course, the downside to be of oil prices fall further than what we expect or maybe if demand is less than what we expect and oil is another one of those sectors where you do have pretty good idiosyncratic risk. A lot of the oil producers are in riskier political jurisdictions, it could always potentially be nationalized with some of those companies, you can always see tariffs or maybe geological conditions could make it more expensive to extract that will from the ground. But even including a lot of those risks, I see a lot of opportunities for investors there.
>> Okay. Move to the next question. How are airlines looking in this environment?
We are in the summertime, peak season.
What are your thoughts?
>> Over the past two years, the airlines really have had the benefit from all that pent up demand for travel from the pandemic. The summer travel season, as you mentioned, is still running pretty strong and most people are looking for that over the short term. However, our economics team and our analysts are starting to see some indications that travel spending may start to normalize over the next 12 to 18 months so I would be pretty careful of the airlines. We think that their valuations are still pricing in a relatively high growth rate for travel whereas we think consumer spending is coming under increasing pressure. We are looking for the rate of the economy to slow.
In that, we do expect that the growth rates for travel will probably drop down towards more normalized historical averages than the strong growth that we have seen over the past two years.
>> Before we let you go, your general thoughts on what investors should be thinking about as we head into the second half of the year?
>> Taking a second look at your portfolio, taking a look at your allocations, taking a look at the kind of risks that you have in your portfolio.
Make sure that you're comfortable with those risks, with the market being overvalued, again, he can stay overvalued but again, once we start taking a selloff, I wouldn't be surprised to see the market taking a sharp correction. It's always hard to know when so make sure that your portfolio can withstand that kind of volatility and that you do you have the risk tolerance to ride that out. If you don't, I think now is a great time to start taking a little profit off the table and get to those allocations that your personal risk tolerance can handle.
>> David, great information, as always.
Thank you very much for joining us.
>> Thank you.
>> Our thanks to David Sekera, chief US market strategist with Morningstar Research.
As always, make sure you do your own research before making any investment decisions.
if we didn't have time to get your question today, we will aim to get it into future shows.
Stay tuned. On Thursday show, Hussein Allidina, head of commodities at TD Asset Management will be our guest taking your questions about commodities.
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That's all for our show today. Take care.
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