The Democrats took back the House in Congress, but control of the Senate remains in the hands of the Republicans. So how do investors navigate this change – and the change in equity markets over the last month? Kim Parlee talks with Bruce Cooper, CEO and Chief Investment Officer at TD Asset Management
So how do investors navigate this change and the change in equity markets over the last month? Joining me to explain this and much more is Bruce Cooper. He is the CEO and Chief Investment Officer at TD Asset Management. And it's great to have you here.
Great to be here.
I want to start with the election results. Let's just start with that. What's your take?
Well, a very interesting night politically. But I don't think, from a market perspective, over time it should have a big impact for a couple reasons. One, this was the expected outcome. You know, Republicans keep the Senate. Democrats take the House. All of the polls I saw suggested that that would be the outcome. And sure enough, it was.
I think the expectation would be in this environment we'd get a bit of traditional US gridlock. So there's not a lot of new policies that come to the fore in the next couple of years. At the same time, the policies that got implemented in the last couple of years, particularly the tax cuts, which of course, were important for markets, will stay in place.
So consensus, status quo-- I don't think a big change.
Yeah. And relief rally, I guess, that's what we'll call it today then.
Yeah. For sure, there was a bit of relief rally. Maybe some expectation built in that there could be a particularly negative outcome. But as you said off the top, markets have been rocky. We've had a decline in the last four to six weeks. And it's not surprising we had a bit of a bounce.
I know a lot of people have been taking a look and said, you know, post midterms traditionally, the markets tend to do not badly. In the next little while, I'd say there's lots of other things in terms of the recipe of what's out there right now that might make that different. But it seems as though people are feeling, to your point, very optimistic today.
After the results last night, yeah, I think that's true. Evaluations have come down to a point where they're not that crazy, so if you're looking stock by stock, you can find things that look interesting, find things that look cheaper than they were a month ago. I'd still say there's lots of headwinds out there.
So to me, this is not a question of we're off to the races. Yeah, we get a bit of a relief rally. We're up a couple of percent in the US there, whatever, much less in Canada. But I don't think this is the start of the next great leg of the bull market or anything.
Yeah. We're still late in the game.
Let me ask you-- we'll get into some of the other issues after the show. But in terms of the politics, and again I know politics-- there are some politics that is-- and we talked about this before-- that's notable, and some of it is noise, in terms of what you pay attention to. But I have heard some commentary today saying that if the president is handcuffed, essentially, there's gridlock in terms of what he can do domestically. He may turn his attention more externally to trade. We already know, of course, that China is a big lift on many, many fronts, but in other ways, too. So is that a concern, maybe?
Well, look, the president can be a bit unpredictable. So I would be reluctant to try and forecast which way he's going to go. Clearly, the relationship with China is exceptionally important to the US. The president's taken a pretty hard line. And our view is that that's likely to continue.
In other words, the friction, the elevated friction between the US and China, is here for a pretty persistent period of time. In some ways, that's not just about Donald Trump, or indeed, just about Donald Trump and some of his advisors. Clearly, some of his advisors are quite antagonistic.
But then, there's also very real issues underneath that. There are lots of Americans, I would say both on the Democratic and the Republican side, that do have concerns about things like patent protection, technology transfer, which is sort of theft of technology. The leadership position on a global basis within technology-- we know the US is the leader today. China aspires to be much more competitive in the areas of technology.
So there are fundamental issues of rivalry in the area of technology that I think will inform that relationship over a very long period of time. Donald Trump has put quite a sharp point on it. But I think even if he wasn't there, some of those issues would exist.
I know that you and your team came out with a report fairly recently called Trump Tariffs and Trade Wars. One thing-- a direct quote from it-- you talk about "This could begin to affect the US consumer, impact corporate supply chains over time." Are we seeing that yet?
Well, I think on the supply chain side, this is something we worry about. Because, of course, if tariffs get raised very, very significantly on companies that are making stuff in China, a lot of those companies are supplying things to US companies. And those US companies will have to then find different sources of supply.
And when we listen to the conference calls and individual companies are making comments, they are certainly at the stage of investigating their alternatives. In some cases--
And publicly declaring so.
--publicly declaring so. In some cases, they might have multiple source of supply, maybe some from China, some from Vietnam. They might be emphasizing the sources from Vietnam today. So I think at the margins you're starting to see supply chains shift around a little, and lots of management teams and boards of directors are thinking very seriously about how that's going to shift over time.
I know one thing you had mentioned when we were chatting earlier, too, is that I think we haven't seen it creep into the numbers, I'll say, yet in the supply chain. But maybe the tariffs are affecting the rest of the world. They just aren't affecting the US yet. Is that being shielded by some stimulus that's in place?
Yeah, I think you're exactly right. We look at the US, and it's still growing very strongly. But growth in two of the other big blocs in the world-- which I think of China and I think of Europe-- has actually decelerated quite a bit.
You don't see it in the Chinese official numbers, which tend to be the same quarter after quarter, very close to whatever the government targets. But when we look at some of the other numbers, kind of underneath the hood in China, the growth is quite a lot slower. So we think the tariffs and some of the frictions between the United States and China is affecting growth in that country. There are a number of policies that China itself put in place 12 to 18 months ago to kind of slow its growth at that time, which are also kind of bearing fruit. They wanted slower growth. Now they're getting slower growth. So I think that part of the world is slow.
And likewise, Europe is, I would say, rather slow right now. It was growing, say, somewhere with what I'd call a two handle, above 2%. And now it's more like at a one handle.
So you kind of decelerated out of fourth gear into maybe second gear in Europe. And out of fourth gear and into third gear in China. And the global economy is moving forward, but it's just at a rather pedestrian, lackluster pace right now.
Does that transmit back to the US?
Well, the US has obviously been protected this year, partly because of the stimulus that got put in place. We had the big tax cuts. And for companies that had tax incentives to invest, do capital expenditures, you put money in consumers' pockets and they spent some of it.
The labor market is exceptionally strong. So the US is a bit of an island right now. I think the question would be-- in a good way, meaning that the economy is growing quite strongly. I think the question in the US is what happens after this stimulus fades, which will happen kind of over the next nine to 12 months. So as we look into the second half, the back half of next year, most of that stimulus is probably out.
Our view is that the trend growth rate in the United States is probably somewhere around 2%. And there's nothing particularly magical about that. To be honest, growth is usually the function of two big things. One is how fast is the labor force growing. In the US, that's something like 0.3 to 0.4.
And then how much productivity do you have? And obviously, it bounces up and down a little bit. But, you know, 1 and 1/2% would be a quite a good number. So take 1 and 1/2% productivity in the labor force, growing at 0.3 or 0.4, you get to something like 2.
That's probably, you know, over a long period of time, how much the US will grow. This 3% level we're seeing today is-- probably can't be sustained for a long period of time. And it's come at the cost of very high budget deficits. That's the kind of flip side of the growth we've been seeing.
Which we'll talk about budget deficits and debt coming right back. All right. Stay with us. When we come back, we're going to have more with Bruce Cooper. He's the CEO and CIO of TD Asset Management. And we're going to delve into central banks, Canada, and, of course, what this all means for earnings. You're watching Money Talk. We'll be right back.
We're back with Bruce Cooper, CEO and Chief Investment Officer at TD Asset Management. We were just leaving off talking about, I'd say, the resting rate, almost, for the US economy. I wanted to get to Canada, if I can, for a second. When you look at Canada right now, and even think about that the trade deal that is not done--
--it is on its way to being done. But there's been a change of government in the States.
In the delivery room.
It's in the delivery room.
Keep these medical--
But there's new doctors in the delivery room now, so--
--what's your outlook for Canada? I mean, what's--
Yeah, so maybe we'll talk about Canadian equities, which have struggled in the last couple of years, right? I mean, US stocks have generally done well, obviously leaving aside October. But Canadian equities have been kind of stuck in the mud for two years.
And I think there's been maybe three or four things that have been overhanging it. One has been the trade deal. Will Canada find itself on the outside looking in?
I think a big one has been all of the issues related to the energy sector. Can we build pipelines? If not, this discount on Canadian oil, which has gotten very wide, as you all know-- so that's been an overhang.
And then I think the high levels of Canadian debt-- people from outside look in and say gee, I'm not sure Canada can continue its economic growth rate, just given how much debt the consumers taken on. So I think those are the key concerns. And you know, as we sit here today, I do personally worry about the consumer balance sheet. I think it's stabilizing. But I think it will take a couple of years to kind of work that through.
The trade side, hopefully, is getting better. We need to see it pass. I think if that does pass, we give that a tick, and say thumbs up, and that's good for Canada.
And the energy side is obviously so important, especially from a stock market perspective, because energy is outsized in the stock market relative to its weight in the economy, actually. We've had some good news. LNG Canada, which is this big $40 billion project, looks like it's going ahead. But we haven't really been successful in building the pipelines we need in order to shrink that discount for Canadian oil.
And so I think investors will wait and watch. And what I've been told is I talked to the contacts industry there's just no interest in gaining stocks from outside Canada. Americans don't care. Europeans don't care. If we could get some of those issues cleared up, we might get a bit of outside investment. And that would lift the market a little bit.
All right. Well, I want to come back to the debt that you were just talking about there, in terms of consumer debt. But I'm going to pivot back to the States. And let's talk about the head of the Central Bank, Mr. Powell. The concern, of course-- there is a Fed meeting, of course, going on right now.
And the concern with everybody is that-- and from the president, who has not been very quiet about this-- that they will overshoot. They will go too far. And tank the economy, essentially. How concerned are you about that?
Well, our perspective all year has been that the Fed had shifted from an emergency stance to a neutral stance, meaning it wanted to get to neutral. And clearly, at the start of this tightening cycle, it was nowhere near neutral. It was at zero.
And now we're somewhere around 2%. Inflation is around 2%. So we're probably getting closer to neutral. But if you look at the Fed and its own comments, they would say neutral is probably somewhere-- 2 and 3/4, 3%, something like that. So it seems clear to me they're going to keep marching along.
I think that will slow the economy. I talked earlier about some of the stimulus that will wane. And I think the other headwind that we're seeing in the US economy is the impact of higher rates-- even, interestingly, at these low levels. Like, you'd say, well, gee, the Fed rate's at 2%. How could that be impacting? But mortgage rates in the US are already at 5%.
Which is double where they a while ago.
And the United States is a bit different than in Canada. Mortgage rates tend to be set off, the 30-year rates, the mortgage rates are 5, which is a relatively high level compared to inflation and relatively high compared to where they've been recently. And so we are seeing-- the housing numbers in the US are just softening. Definitely they're not tanking or anything like that-- it's just they're softening. And so to me, it's consistent with this idea that growth will slow a little bit, decelerate a little bit in the United States.
And part of this is the response to higher interest rates, kind of played through the housing economy. And part of it is just the annualizing of the stimulus impact, and it just kind of goes away. And that's partly what takes you back to the sort of 2% level we talked about earlier.
I'm going to boil this all down to a market outlook at the end. I'm going to make people wait for that, though. Canada, same thing, the bank-- Governor Poloz talked about neutral, getting to neutral. How concerned are you given, again, the consumer debt being one concern?
Well, yeah, I think because of the high levels of debt in Canada, the economy will be quite interest-rate-sensitive. And my perspective has been that rates can't go very high. Because as they inch in that direction, the economy will just naturally slow.
And I still have that view. So today, just like in the US, we're getting close to 2%. I think we will keep pushing a little bit. But if we get to, say, 2 and 1/2 or 2 and 3/4 on the bank rate, I think that's probably about as far as we can go before the Canadian economy just slows quite a bit.
And that's where you-- do you believe he'll stop there? Or they will stop there?
I think all the central banks will be, I think, data-dependent. And--
Yeah. --we'll have to see what that data looks like. But I do expect that as the hikes kind of unfold over the next little while, the data will soften a little bit. And they will be mindful of that.
All right. Stay with us. When we come back, we're going to find out what that means also for earnings, and companies, and of course, valuations. And what Bruce's take is on the equity markets are as we look ahead. You are watching Money Talk. We're back with that conversation right after this.
We're back with Bruce Cooper. He is, of course, the CEO and CIO at TD Asset Management. We've talked interest rates. We've talked politics. We've talked the economy.
Let's bring it back to earnings and then to the market. So we've just come through-- we're almost near the end of earnings season. And it's interesting, because you can tell whether it's a bullish or bear sentiment, because, I mean, the numbers have actually been pretty fantastic.
The guidance has not been, maybe, what's expected. And they've gotten smacked for it.
Yeah. But if we start by looking back, how have the results been, corporate health really is very robust in the United States. So third quarter earnings, revenues are growing something like 9%, 8% or 9%, earnings per share are 26. Which is a remarkable number.
Well, it's the third quarter in a row we've been above 20%.
And in addition to the growth being good, the free cash flow-- which we care about a lot, because that's what funds dividends and the ability to buy back stock and all that kind of good stuff-- is also very, very strong. So the volatility recently clearly has not been caused by any challenges with the earnings we've seen so far.
Has it been more just on the qualitative-- here's what we're concerned about moving ahead?
Yeah, to me, it's linking up some of the economic stuff we talked about earlier and then how that will impact companies going forward. So look, if China's slowing and Europe's slowing, and there's some signs the US is decelerating also, the companies-- they live in this world.
So you cannot generate 20% earnings growth in an environment where growth is waning. Clearly, some of that earnings growth was a result of the tax cuts, which would just naturally get annualized when we get to the first quarter next year.
That's by definition a one-time event. So I think the debate in the market about earnings next year is some people think it's going to be 10%. Some people think it's going to be five. Some people think maybe it's going to be zero. And you know, we'll see as time unfolds.
I'd probably be somewhere in the middle of that, probably closer to five than 10. But the economy, while decelerating, is still moving forward. So I'm not despondent about it.
And what about the PE on top of all that?
Yeah, so the valuations in the US have come down. If you think about it, stocks are roughly flat this year. It's been kind of a volatile path to flat.
And i just told you that the earnings are up 26%. So that tells you the PE is contracted by something like 26%.
And the numbers are-- it's gone from something like 18 and 19 times to something like 15 to 16 times. So at 15 to 16 times, I think that's in the region of fair value. I don't think it's-- it's definitely not super expensive. But on the other hand, definitely not super cheap.
I think about in 2009, bottom of the market, the S&P traded at 10 times trough, depressed earnings. Like, that was--
--for sale sign, epically cheap.
Today, you're at 15 to 16 times sort of--
So I think the way to think about it is we want to buy very high-quality businesses. We continue to like dividend growers. Interest rates continue to be low. If you can get kind of a good stream of growing dividends, I think that's terrific.
This is not a time to speculate, in my opinion. So you should be able to generate, from a portfolio of very high-quality businesses, returns that will be above the rate of inflation and preserve and grow the real value of your savings over time, which is the goal of investing. But I don't think you're getting any phenomenal returns from these levels.
Let me ask you. I've only got about two minutes left. But cannabis--
--from the Canadian market standpoint, how much has that distorted the market, in terms of either the attention it's getting, the flows that it's getting?
Yeah. I think there are a couple of distortions. And then there's maybe one final comment I'll make. I think, sort of below the surface, what it's done is sucked a lot of the energy out of other parts of the market that sometimes attract what I'll call speculative money. And so in Canada, things like small cap mining and small cap oil and gas--
Which is a double whammy when you've got Western Canadian select at this level.
So those markets are kind of dead and quiet. And investors that might typically take a punt on some of those are now taking a punt on cannabis. So to be honest, that doesn't really affect our business very much, because we're trying to invest way up the quality curve. But I think for some investors that probably is having some impact.
As it relates to the cannabis stocks itself, our perspective is very simple. Successful investing starts with a philosophy. And our philosophy is around investing in high-quality businesses with high returns on capital, with strong, free cash flow, pay good dividends, grow their dividends over time.
They're not there yet.
Cannabis stocks are just not in that category. We would view them as relatively speculative, risky. So I wouldn't want to put-- well, we wouldn't put any of our money there. And I wouldn't recommend that people put a lot of their money there.
And we will leave that there. Bruce, thank you so much for coming in.
Great to be here.
That is Bruce Cooper. He is the CEO and CIO of TD Asset Management. Thank you for joining us tonight. If you have any comments or questions on anything you have seen, or if you have questions, you'd like someone to take a look at your portfolio, if you have some planning questions-- we'd love to hear from you.
You can email us at [email protected] I will get you in touch with someone who can answer those questions for you. And anything you want to see again, you can always go to MoneyTalk.go.com. Thanks so much for watching. And hope to see you again next week.