Show Transcript
The strong market performance seen in the first half of the year is showing signs of continuing into the second half. Ben Gossack, Portfolio Manager at TD Asset Management, says although much of focus has been on a few large-cap stocks, there may be opportunities elsewhere in the markets.
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[AUDIO LOGO]
* Let's start with the big picture. When we talk about the big themes that are happening so far this year, everyone talks about, it's the tech stocks, it's the bank stocks in terms of watching what's actually going on and seeing some of the bullishness. Do you agree with that?
* So there's definitely been a very strong narrative about seven stocks driving this market and the market not reflecting some of the macro situations that are happening on the ground. Yes, I have quite a lot of challenge pushing back against that. I agree mechanically we've seen large market cap stocks rush up.
* I would also argue that that ignores what happens in 2022. So, as an industry, we really care about year-to-date and calendar performance.
* So, yes, this is probably the best start of a first half for the NASDAQ. It's up about 45%. But it was very difficult for any investor or portfolio manager to own any of these stocks in 2022. And if you look at their long-term price charts, they made their lows effectively when we rotated around the sun and celebrated the new year.
* So if you own some of these big social media stocks, streaming stocks, technology stocks, you might have been down 50% to 60% last year. So to be up, let's say, 45% or 50%, if you're a long-term investor, you've just lost less money, but you haven't made money. So there's a bit of-- I see what's going on as exciting. But it does hide a lot of the stuff that we're seeing below the market.
* And I would argue this market, that we're seeing right now, is very broad right now. And there's a lot of strong stocks going on. Just, you can't see it from a market cap perspective.
* So that brings us to your next group of points, and we're going to be talking about is the market cap perspective versus a different kind of way of measuring in terms of the stock performance. And you brought a few charts in to help make your point. So are we going to start with industrials?
* Yeah. I mean, I have a benchmark. I'm measured against market caps. So I understand our focus for market caps. But what I like to do is, I'm fascinated with trends, looking for patterns. Typically, we spend a lot of time on relative strength.
* The way that I measure relative strength, so that would be-- we're looking at industrials. So I take the price of the industrials ETF. And I divide it by the price of the S&P 500. So, effectively, what people are looking right now is a fraction. And I'm able to run it over time. On the--
* OK, so--
* Sorry, go ahead.
* So I was going to say, so on the left-hand side is what? And then tell me what's on the right-hand side.
* So on the left-hand side you're looking at the industrials sector within the S&P 500 over the S&P 500, so the entire market, on a market cap basis. And when you look at the left-hand side chart you'd say, ho hum.
* [LAUGHS]
* There is not much relative strength within the industrials. In fact, maybe this aligns with the narrative that this market is only driven by seven stocks. These industrial stocks are very tied to the economy. Data is weakening, and hence, therefore, this market shouldn't be believed.
* The right-hand side?
* Right. So if you look at the industrial sector, it's composed of 75 stocks. The top 10 stocks represent 40% of the weight. So if you get some conglomerates that are underperforming, if you get some rails underperforming, it really hides and distorts what's going on with the other 65 stocks.
* If we do this an equal weight basis, so we treat every company equal, and we divide that by every company in the S&P 500 equally, what you see is probably an extremely amazing chart of incredible bullishness within the industrial sector.
* What I would also point out is that this breakout that we're seeing started in March of 2022, which is roughly when the Federal Reserve and other central banks started their unprecedented hiking cycle.
* Raising, yeah.
* Which theoretically should slow down these macroeconomic sensitive stocks.
* I'd also argue there seems to be a longer term trend with COVID coming in between, showing a secular story within industrials. But you just can't see it from a market cap perspective.
* It's distorted.
* And even within our portfolios, many of the stocks that either we own or we follow, we've noticed are either at 52-week highs or pushing to all-time highs. So looking at everything on a market cap basis would tell you, oh, there's nothing happening in industrials. But you've missed out on a ton of returns.
* What about-- so and when you talk about that it might be painting a picture-- [CLEARS THROAT] excuse me-- of a secular change or just a-- what would be contributing to that? What do you see? Because hiking rates, people would think, OK, less economic activity, that hurts industrials. But what else could be on the other side of the ledger?
* Right. And I think industrials are an exciting sector in terms of portfolio and stock selection but very difficult, I think, for people to understand. Because anything that doesn't fit into a category goes into industrial. So you have conglomerates, electrical components, machinery. You got the airlines. You got aircraft suppliers, professional services, a whole bunch of stuff.
* Big theme in terms of thematics-- and we do care about secular trends-- you've had underinvestment, so capital expenditure by companies, for many years. So we're overdue for modernization.
* We've seen reshoring efforts. Some of it is just for decarbonization. If I don't have to ship my components across the ocean and I build it locally, I can save a ton of greenhouse gas emissions.
* Yeah.
* We've seen a lot of government, let's say, bills to help this. So we had the CHIPS Act.
* Yeah, trade wars will help. [LAUGHS]
* Exactly. So we're building these billion dollar semiconductor facilities. That requires construction and building materials, all that type of stuff. We have the Inflation Reduction Act, which-- so decarbonization, electrification. You have to retool the electrical grid. We're looking at building ways to store carbon. And we want to have hydrogen and pipelines.
* This requires infrastructure. This takes years to build. And these are being reflected in these stocks, and the stocks are getting rewarded for it.
* We've been talking about what's been happening in terms of the markets and how to examine those markets to understand the real strength of what's happening underneath the indices sometimes, which can get distorted by big companies and what's happening. And Ben has told us a way that he was looking at industrials.
* But you've also done it with discretionaries. You've also done it with technology, and also in healthcare, which I'm really interested in healthcare.
* Yes.
* So I want to get to all of them. But let's start with discretionary. Tell us what you did with this one.
* So when we talk about the discretionary sector, you're really talking about Tesla and Amazon. These two stocks represent about 50% of the discretionary market.
* So if you're looking at a relative strength chart, so if we take discretionary, we put it over the S&P, that's on the left-hand side. You can see it underperformed in 2022. We know what Amazon and Tesla did. And then, we have a period of relative strength now for 2023.
* The rebound, yeah.
* And you'd say, yeah, that's seven stocks driving the market.
* Yeah.
* Now, if we equalize and we treat every company equal. And think about all the exposures that make up the discretionary sector. You have retail. You have auto companies, auto parts suppliers, tons of leisure. So hotel. You have--
* Cruise lines, right?
* --cruise lines. You have gambling. There's a whole bunch of stuff that make up discretionary. We treat that all equally. And you almost have a similar story to what we see in industrials. You see a breakout of activity and relative strength, also, I would argue, since April of 2022.
* And it's funny too, because we do see-- I just think about when we talk with the airlines, they're all hitting highs right now. Lots of people traveling right now. So, again, the same thing, where you're just-- there is strength. We are seeing consumer strength in there.
* And then, you push-- yeah, it gives you an opportunity to push back around some narratives about the health of the consumer, how they're dealing with the rise in interest rates. And, again, this is about owning stocks, outperforming benchmarks over the long run.
* So it's a question of, yes, there are things that are happening and impacting people's pocketbooks. And then, there's a different discussion about what's happening within the stocks.
* Yeah. Let's talk-- take a look at technology and what you saw there.
* Yeah, so, again, I don't disagree with the narrative. You have Apple, and Microsoft, and NVIDIA. Those three stocks are roughly 60% of the technology index. But there's 65 stocks within the technology index. And so, when we put market cap technology over the S&P 500, there is outperformance in technology. I don't think I need to convince anyone about that.
* No.
* What I find fascinating is you have a very similar chart when you treat everybody equally. And what that tells you is not just Microsoft, and NVIDIA, and Apple. Just about every technology stock on average, be it big or small, is outbreaking and is showing strength relative to the market.
* It's interesting, because when you look at these ones, those are probably the most similar sets. They look the same when you put the two side by side.
* But, again, it pushes back around this narrative that it's only three stocks.
* Yeah, it's just them.
* Lots of technology stocks are showing strength.
* Yeah, the breadth is definitely there. Finally, I want to spend some time on this one, which is healthcare.
* Yeah, so healthcare, massive outperformance in 2022, specifically in pharma stocks. We're going on this interest rate hike. We saw technology stocks come down, other growth stocks come down. And healthcare was your safe haven.
* And you get this rise up. And we saw a tremendous breakout for all these healthcare companies. And so, the narrative would be, well, while we saw it outperform, the story for 2023 is, abandon all ships.
* Yeah.
* Do not own healthcare. And, again, I would agree with this on a market cap basis. We've seen many medical device companies, medical supply companies. We've seen certain pharma companies all come off their highs and underperform.
* But if you treat every healthcare stock equally and get rid of this distortion of market cap, on the right-hand side, it paints a completely different picture.
* It really does. Yeah, you really see this, I would say, this little secular trend that is really starting to drive up on the right-hand side. And is it just some of the smaller players that-- it is, obviously, just some smaller-- you're seeing the strength from those smaller players.
* And I'll ask you the same question I asked you about the industrials. What is the story, do you think, that's feeding that breadth that we're seeing?
* We have that slow-moving train of baby boomers.
* Yeah.
* And we know when you hit a certain age, you consume more, let's say, more services and more--
* Things break, Ben, that's what happens, right?
* Things break. You got to take more drugs. So you consume more medical services. We've also had breakthroughs in innovation.
* Yeah.
* And so, I would argue, when I look at a chart like that, I find it very exciting. We spend a lot of time in healthcare. It, again-- I think it's like industrials, an area for a portfolio manager or investor. There are lots of opportunities to do the work, have a process, have a philosophy, find stocks.
* And so, while you might look at on a market cap basis healthcare is underperforming, if you found the right pharma company, the right biotechnology company, the right supplier, the right insurer, you can significantly outperform.
* I think it was-- not to put words in your mouth. But I know I was speaking with somebody last week, talking about just the advances in AI. And, again, that's-- a lot of it's priced in. But it's almost like the secondary advances that come from developing new drugs, testing new drugs.
* In the healthcare space, they're saying, we've barely scratched the surface of what AI can actually do and saying, in 10 years, we could each have our own bespoke drugs for my breaking-down body as I get older kind of thing. So it's amazing. And that's what I see that that secular trend.
* Yeah. We have-- yeah, I mean, AI is being discussed. I mean, just the fact that we can-- we're getting returns on the Human Genome Project. And we could see a drug this year that has a cure for sickle cell anemia. And that's going in and doing gene editing.
* There are some companies that are growing and they're silencing genes. And so, you're seeing a lot of stuff, even now, about reducing dementias like Alzheimer's. Doesn't cure it, but can reduce the onset.
* So there's a tremendous amount of activity and excitement. And then, yeah, you just have to do the work. It's not-- you can't just buy a company.
* What's great about healthcare versus, let's say, technology, we see software companies improving. You can buy a lot of software companies. You could see developments in pharma. But if you buy the wrong pharma company, it could be disaster or it could be a great night.
* Yeah.
* [LAUGHS]
* Yeah. Last thoughts? I mean, just because, overall, I would say, this feels bullish, that this feels bullish.
* Yes.
* Is there any caveat to go with this?
* So I've been going about a thesis of less bearish. Lots of people are bearish. I have things that I'm bearish about. I've just felt that it's been better to be less bearish.
* Things I worry about, I'm always about that only the paranoid survive. So the stuff that I care about, the stuff that I think would change some of these trends, I do worry about a re-acceleration of inflation.
* Yeah.
* I feel like that would change things. Right now, we're seeing the easy compares. And we see inflation coming down. But if there was a re-acceleration, that might change what I'm seeing right now.
* The other thing that I would say that I'm worried about is, I do believe prices, stock prices, are leading indicators. They can factor in a lot of bad news, sometimes even a year, year and a half in advance. The only thing I can't tell you, Kim, is how much bad news they've factored in.
* Right.
* So every time something comes up and I'm like, oh, I didn't expect that.
* Yeah. Probability of 5% or 50%.
* That looks new.
* Yeah.
* Was that factored in or not? So far, any of the bad news that we've seen, the headlines, seem to have been factored in. But I'm always worried about that next headline being like, was that captured, or is that new information? And that changes the trends that we've been watching.
[AUDIO LOGO]
[MUSIC PLAYING]
* Let's start with the big picture. When we talk about the big themes that are happening so far this year, everyone talks about, it's the tech stocks, it's the bank stocks in terms of watching what's actually going on and seeing some of the bullishness. Do you agree with that?
* So there's definitely been a very strong narrative about seven stocks driving this market and the market not reflecting some of the macro situations that are happening on the ground. Yes, I have quite a lot of challenge pushing back against that. I agree mechanically we've seen large market cap stocks rush up.
* I would also argue that that ignores what happens in 2022. So, as an industry, we really care about year-to-date and calendar performance.
* So, yes, this is probably the best start of a first half for the NASDAQ. It's up about 45%. But it was very difficult for any investor or portfolio manager to own any of these stocks in 2022. And if you look at their long-term price charts, they made their lows effectively when we rotated around the sun and celebrated the new year.
* So if you own some of these big social media stocks, streaming stocks, technology stocks, you might have been down 50% to 60% last year. So to be up, let's say, 45% or 50%, if you're a long-term investor, you've just lost less money, but you haven't made money. So there's a bit of-- I see what's going on as exciting. But it does hide a lot of the stuff that we're seeing below the market.
* And I would argue this market, that we're seeing right now, is very broad right now. And there's a lot of strong stocks going on. Just, you can't see it from a market cap perspective.
* So that brings us to your next group of points, and we're going to be talking about is the market cap perspective versus a different kind of way of measuring in terms of the stock performance. And you brought a few charts in to help make your point. So are we going to start with industrials?
* Yeah. I mean, I have a benchmark. I'm measured against market caps. So I understand our focus for market caps. But what I like to do is, I'm fascinated with trends, looking for patterns. Typically, we spend a lot of time on relative strength.
* The way that I measure relative strength, so that would be-- we're looking at industrials. So I take the price of the industrials ETF. And I divide it by the price of the S&P 500. So, effectively, what people are looking right now is a fraction. And I'm able to run it over time. On the--
* OK, so--
* Sorry, go ahead.
* So I was going to say, so on the left-hand side is what? And then tell me what's on the right-hand side.
* So on the left-hand side you're looking at the industrials sector within the S&P 500 over the S&P 500, so the entire market, on a market cap basis. And when you look at the left-hand side chart you'd say, ho hum.
* [LAUGHS]
* There is not much relative strength within the industrials. In fact, maybe this aligns with the narrative that this market is only driven by seven stocks. These industrial stocks are very tied to the economy. Data is weakening, and hence, therefore, this market shouldn't be believed.
* The right-hand side?
* Right. So if you look at the industrial sector, it's composed of 75 stocks. The top 10 stocks represent 40% of the weight. So if you get some conglomerates that are underperforming, if you get some rails underperforming, it really hides and distorts what's going on with the other 65 stocks.
* If we do this an equal weight basis, so we treat every company equal, and we divide that by every company in the S&P 500 equally, what you see is probably an extremely amazing chart of incredible bullishness within the industrial sector.
* What I would also point out is that this breakout that we're seeing started in March of 2022, which is roughly when the Federal Reserve and other central banks started their unprecedented hiking cycle.
* Raising, yeah.
* Which theoretically should slow down these macroeconomic sensitive stocks.
* I'd also argue there seems to be a longer term trend with COVID coming in between, showing a secular story within industrials. But you just can't see it from a market cap perspective.
* It's distorted.
* And even within our portfolios, many of the stocks that either we own or we follow, we've noticed are either at 52-week highs or pushing to all-time highs. So looking at everything on a market cap basis would tell you, oh, there's nothing happening in industrials. But you've missed out on a ton of returns.
* What about-- so and when you talk about that it might be painting a picture-- [CLEARS THROAT] excuse me-- of a secular change or just a-- what would be contributing to that? What do you see? Because hiking rates, people would think, OK, less economic activity, that hurts industrials. But what else could be on the other side of the ledger?
* Right. And I think industrials are an exciting sector in terms of portfolio and stock selection but very difficult, I think, for people to understand. Because anything that doesn't fit into a category goes into industrial. So you have conglomerates, electrical components, machinery. You got the airlines. You got aircraft suppliers, professional services, a whole bunch of stuff.
* Big theme in terms of thematics-- and we do care about secular trends-- you've had underinvestment, so capital expenditure by companies, for many years. So we're overdue for modernization.
* We've seen reshoring efforts. Some of it is just for decarbonization. If I don't have to ship my components across the ocean and I build it locally, I can save a ton of greenhouse gas emissions.
* Yeah.
* We've seen a lot of government, let's say, bills to help this. So we had the CHIPS Act.
* Yeah, trade wars will help. [LAUGHS]
* Exactly. So we're building these billion dollar semiconductor facilities. That requires construction and building materials, all that type of stuff. We have the Inflation Reduction Act, which-- so decarbonization, electrification. You have to retool the electrical grid. We're looking at building ways to store carbon. And we want to have hydrogen and pipelines.
* This requires infrastructure. This takes years to build. And these are being reflected in these stocks, and the stocks are getting rewarded for it.
* We've been talking about what's been happening in terms of the markets and how to examine those markets to understand the real strength of what's happening underneath the indices sometimes, which can get distorted by big companies and what's happening. And Ben has told us a way that he was looking at industrials.
* But you've also done it with discretionaries. You've also done it with technology, and also in healthcare, which I'm really interested in healthcare.
* Yes.
* So I want to get to all of them. But let's start with discretionary. Tell us what you did with this one.
* So when we talk about the discretionary sector, you're really talking about Tesla and Amazon. These two stocks represent about 50% of the discretionary market.
* So if you're looking at a relative strength chart, so if we take discretionary, we put it over the S&P, that's on the left-hand side. You can see it underperformed in 2022. We know what Amazon and Tesla did. And then, we have a period of relative strength now for 2023.
* The rebound, yeah.
* And you'd say, yeah, that's seven stocks driving the market.
* Yeah.
* Now, if we equalize and we treat every company equal. And think about all the exposures that make up the discretionary sector. You have retail. You have auto companies, auto parts suppliers, tons of leisure. So hotel. You have--
* Cruise lines, right?
* --cruise lines. You have gambling. There's a whole bunch of stuff that make up discretionary. We treat that all equally. And you almost have a similar story to what we see in industrials. You see a breakout of activity and relative strength, also, I would argue, since April of 2022.
* And it's funny too, because we do see-- I just think about when we talk with the airlines, they're all hitting highs right now. Lots of people traveling right now. So, again, the same thing, where you're just-- there is strength. We are seeing consumer strength in there.
* And then, you push-- yeah, it gives you an opportunity to push back around some narratives about the health of the consumer, how they're dealing with the rise in interest rates. And, again, this is about owning stocks, outperforming benchmarks over the long run.
* So it's a question of, yes, there are things that are happening and impacting people's pocketbooks. And then, there's a different discussion about what's happening within the stocks.
* Yeah. Let's talk-- take a look at technology and what you saw there.
* Yeah, so, again, I don't disagree with the narrative. You have Apple, and Microsoft, and NVIDIA. Those three stocks are roughly 60% of the technology index. But there's 65 stocks within the technology index. And so, when we put market cap technology over the S&P 500, there is outperformance in technology. I don't think I need to convince anyone about that.
* No.
* What I find fascinating is you have a very similar chart when you treat everybody equally. And what that tells you is not just Microsoft, and NVIDIA, and Apple. Just about every technology stock on average, be it big or small, is outbreaking and is showing strength relative to the market.
* It's interesting, because when you look at these ones, those are probably the most similar sets. They look the same when you put the two side by side.
* But, again, it pushes back around this narrative that it's only three stocks.
* Yeah, it's just them.
* Lots of technology stocks are showing strength.
* Yeah, the breadth is definitely there. Finally, I want to spend some time on this one, which is healthcare.
* Yeah, so healthcare, massive outperformance in 2022, specifically in pharma stocks. We're going on this interest rate hike. We saw technology stocks come down, other growth stocks come down. And healthcare was your safe haven.
* And you get this rise up. And we saw a tremendous breakout for all these healthcare companies. And so, the narrative would be, well, while we saw it outperform, the story for 2023 is, abandon all ships.
* Yeah.
* Do not own healthcare. And, again, I would agree with this on a market cap basis. We've seen many medical device companies, medical supply companies. We've seen certain pharma companies all come off their highs and underperform.
* But if you treat every healthcare stock equally and get rid of this distortion of market cap, on the right-hand side, it paints a completely different picture.
* It really does. Yeah, you really see this, I would say, this little secular trend that is really starting to drive up on the right-hand side. And is it just some of the smaller players that-- it is, obviously, just some smaller-- you're seeing the strength from those smaller players.
* And I'll ask you the same question I asked you about the industrials. What is the story, do you think, that's feeding that breadth that we're seeing?
* We have that slow-moving train of baby boomers.
* Yeah.
* And we know when you hit a certain age, you consume more, let's say, more services and more--
* Things break, Ben, that's what happens, right?
* Things break. You got to take more drugs. So you consume more medical services. We've also had breakthroughs in innovation.
* Yeah.
* And so, I would argue, when I look at a chart like that, I find it very exciting. We spend a lot of time in healthcare. It, again-- I think it's like industrials, an area for a portfolio manager or investor. There are lots of opportunities to do the work, have a process, have a philosophy, find stocks.
* And so, while you might look at on a market cap basis healthcare is underperforming, if you found the right pharma company, the right biotechnology company, the right supplier, the right insurer, you can significantly outperform.
* I think it was-- not to put words in your mouth. But I know I was speaking with somebody last week, talking about just the advances in AI. And, again, that's-- a lot of it's priced in. But it's almost like the secondary advances that come from developing new drugs, testing new drugs.
* In the healthcare space, they're saying, we've barely scratched the surface of what AI can actually do and saying, in 10 years, we could each have our own bespoke drugs for my breaking-down body as I get older kind of thing. So it's amazing. And that's what I see that that secular trend.
* Yeah. We have-- yeah, I mean, AI is being discussed. I mean, just the fact that we can-- we're getting returns on the Human Genome Project. And we could see a drug this year that has a cure for sickle cell anemia. And that's going in and doing gene editing.
* There are some companies that are growing and they're silencing genes. And so, you're seeing a lot of stuff, even now, about reducing dementias like Alzheimer's. Doesn't cure it, but can reduce the onset.
* So there's a tremendous amount of activity and excitement. And then, yeah, you just have to do the work. It's not-- you can't just buy a company.
* What's great about healthcare versus, let's say, technology, we see software companies improving. You can buy a lot of software companies. You could see developments in pharma. But if you buy the wrong pharma company, it could be disaster or it could be a great night.
* Yeah.
* [LAUGHS]
* Yeah. Last thoughts? I mean, just because, overall, I would say, this feels bullish, that this feels bullish.
* Yes.
* Is there any caveat to go with this?
* So I've been going about a thesis of less bearish. Lots of people are bearish. I have things that I'm bearish about. I've just felt that it's been better to be less bearish.
* Things I worry about, I'm always about that only the paranoid survive. So the stuff that I care about, the stuff that I think would change some of these trends, I do worry about a re-acceleration of inflation.
* Yeah.
* I feel like that would change things. Right now, we're seeing the easy compares. And we see inflation coming down. But if there was a re-acceleration, that might change what I'm seeing right now.
* The other thing that I would say that I'm worried about is, I do believe prices, stock prices, are leading indicators. They can factor in a lot of bad news, sometimes even a year, year and a half in advance. The only thing I can't tell you, Kim, is how much bad news they've factored in.
* Right.
* So every time something comes up and I'm like, oh, I didn't expect that.
* Yeah. Probability of 5% or 50%.
* That looks new.
* Yeah.
* Was that factored in or not? So far, any of the bad news that we've seen, the headlines, seem to have been factored in. But I'm always worried about that next headline being like, was that captured, or is that new information? And that changes the trends that we've been watching.
[AUDIO LOGO]
[MUSIC PLAYING]
