Vitali: … the world we're living in today under the present administration in the policy setting is highly uncertain. And there are a number of paths that that the economy could take and the markets could take with them. Right. And some of those are very good. Some of those are not so good…
Chiara: Welcome to The ETF Experience podcast where we dive into markets with a rhyming twist. Today it is April showers bringing May's flowers. But while equities bloom in May's sunny hours helping me to dive into this rhyme, joining us are two experts from our public equities research team here at TD Asset Management. Juliana Faircloth, vice president and director on the public equities team and Vitaly Mossounov had a fundamental equity research. Welcome to the show, guys. Thank you for having us. So let's dive right in. We've got a US stock market that's been lagging a correction that's shaking things up has cooled off. And Trump tariffs throwing a curveball into the global economic picture. Markets have experienced a sharp decline following President Trump's Liberation Day tariff announcement, sending the S&P 500 down, contributing to a roughly 10% decline over the last two days.
Chiara: The Nasdaq even entered a bear market territory, down over 20% from its peak. All of this quickly turned around on April 9th, when Trump paused a most tariff except those on China, for 90 days, leading to a historic rally. So, Giuliana, that was a mouthful. You have the top of a house views. Leading our equity research team. What is your take on the big market swings in 2025?
Juliana: Sure. Well, it's been quite a year. You just share a lot of content and we're not even halfway through the year. I think for us, it's helpful to, rewind back a little bit further than the beginning of 2025, because there's a lot to reflect on in the last couple of years. And so if you told us five years ago when it was March 2020, we were all sent home that the S&P 500 would double over, the next five years?
I think we'd probably laugh and not believe you. we've had a very incredible five years in the market. The S&P 500 has been up 20% four of the last five years. that's been incredible. It's been underpinned by fiscal and monetary stimulus, by a really strong consumer backdrop, and by very resilient corporate earnings. So earnings have grown 60% over the last five years.
So that's the foundation we're working with. 2025 as you mentioned, is looking quite differently. And I think the key word for this year has been uncertainty. We have a new administration, radically changing policies, overhauling the global trade order in, in a matter of a few weeks and days. And markets don't perform very well in uncertain times.
Investors look for predictability. And that's what gives people comfort. So as a result, we've seen, you know, a ton of volatility. and that uncertainty is playing out in in many different ways. Yeah. We've seen, you know, some of the big companies in the US pull out the earnings revisions because we just have no idea what holds what the next day holds.
Chiara: Right. so how should investors be thinking about these uncertain times. Right. is it an opportunistic time to get back into the market, or should we pull out, like having the top of the house views? How should you navigate these times?
Vitali: Well, Julianna went back about five years. I think there's some sense to going back even further. Go back a century and just reevaluate what is the record of the market. And the record of the market is that there are periods of throughout the market is really a pendulum. As many investors have commented, it swings from greed to fear and it's always moving in one direction of the next.
And arguably we've hit a really high degree of fear on that pendulum. And if you look back at that last hundred years, you see a record where that's happening again and again and again, and what the history of corporate American markets would tell you is that those are typically in the vicinity of where markets present attractive entry opportunities.
So we know that U.S. corporate earnings typically compound nine, 10% or so over the long run. That's the long run record of the market. Whenever you have big corrections of 15, 20% or whatever it is on any given day, it's quite a lot of volatility, volatility that improves your probabilities going forward of getting a return so long again, as you have the right time horizon, that long term time horizon, if you're really investing, if you're doing something else, if you're speculating in securities, that's of course, a completely different conversation for a different podcast.
Chiara: So as we've talked about, there's chatter that we may be enter entering a market correction. You know you kind of touched upon this, but do you think this is a healthy pullback or something that investors should be concerned about given that, you know, there's talks that this could be a manmade Trump recession.
Vitali: Well the last answer I gave I hate to kind of, you know, go back and say let's say the exact same thing again. Right. But a healthy correction, it's a little bit difficult to define that. Exactly. Right. Every correction of course, to the psychology of the investor feels painful. Right. Do you look at your statement, you look at the screen of your smartphone and you're down.
On the other hand, as I said, whenever the market is down, it's presenting a lower price paid per unit of earnings. Right. It becomes mathematically more attractive. Entry point, I think pivoting that conversation a little bit to just the manmade recession and the impact of policy today. Undeniably, these are times, at least for this generation of investors that are unprecedented.
You have the policymakers of the most consequential economy in the world that are acting in a way as to create a lot of possible outcomes, far more than just the binary spread here. And some of these, of course, could mean very bad outcomes for the economy, for employment, for consumer spending, and therefore for the market. Right. But when that pendulum is swinging, as it did just a week or two ago when we saw the VIX and reminded the audience, the VIX is that measure of really fear and greed in the market.
It is the next 30 days expected volatility for the options for the options markets. And we saw that VIX rise way above 50 I think the reading might have been even 60 zero. Now you've only seen readings at those sort of levels. very infrequently for example or a reading of 80 or so. That's the record. And that you'd have to go back to 2008 and the height of the pandemic went.
You saw it was over basically. Right? It was over not just for the markets, but for humankind. And so that just gives you a sense of how fearful the markets were. And that, of course, then you see that demonstrated in the in the magnitude of the correction. We went into a full blown bear market. They're down 20.
And so you piece those together and you know, and you start really asking yourself, well, everyone's panicking. Where are the opportunity.
Chiara: And it's almost in simple terms, we could say you're buying your favorite clothing item at a discount. So are there any trends or surprises that have caught your attention since the beginning of the year?
Vitali: Lots of.
Juliana: One. Maybe I'll start with just a trend that talked about a little bit already. The consumer has been a huge driver of market growth over the last five years, and that has played out through a number of different kind of industries and themes like luxury was very strong for a good period of time. We've seen a lot of change in consumer behavior.
Consumer sentiment has really dropped off a cliff, just the same way that markets don't like uncertainty. Consumers also don't like uncertainty. And people are feeling, you know, cautious about their spending. so the way we see that kind of playing out in the market is through sort of a consumer bifurcation where, you know, the people on the very high end don't feel necessarily a lot of impact, at least at this stage.
But you're seeing a lot of trade down through kind of the middle income consumer and into the low income consumer. So some interesting opportunities for, you know, retailers that to you, a little more low income, maybe moving away from some consumer services. Airlines have started reporting. We've already heard some, you know, more cautious commentary from Delta Air Canada's commented about cross-border travel, which is, you know, partly consumer confidence, partly that by local, by Canadian.
But that's been an interesting trend unfolding over the last few months. I want to dive deeper onto corporate earnings. Right. We know we are coming on to earnings season. But mind you, all of that is still backwards. Looking right doesn't take into account what's happened in the last two weeks, which has a huge impact. We've seen Walmart pull their earnings revisions.
Chiara: So how is you and the team navigating that?
Vitali: The beautiful thing about the market of course, in that, in that pendulum of fear and greed is that that maximum fear especially is what I've seen with the market down over 20 on those headline tariffs at maximum fear, the market is discounting the state of the future, and it no longer believes the earnings that may have been published.
The forecast that companies took the time to publish at the beginning of the year. So a lot of it, you could say, is already in the price. As far as how the team is navigating it is it's exactly figuring out what's in the price, and the only way you can figure out what's in the price is doing the really difficult work.
And so we have one of Canada's largest fundamental research teams, over 20 analysts that are experts in their respective domains, whether it's not just consumer, but we have somebody that would be an expert specifically in transportation. Johan actually is one of those experts, among other things. But then in areas like, you know, AI technology or, something as distinct as, let's say hotels or other, areas of travel.
So getting into those financial models and understanding, well, what is the degree of resilience to various, let's say sensitization to the demand environment? What is the impact of tariffs directly, of course, on supply chains. what are the characteristics of that business in order to say, exercise pricing power as maybe needed during an inflationary period, we can go on and on and on.
Right. But really, it's the hard work to figure out what's priced into a security, but it has to be done at a bottoms up level with a lot of deep work done by experts, at long, grueling hours at the office.
Chiara: Pivoting a little bit, you know, we hear the saying often, cells may go away. April showers brings May's flowers. and after all, we are an asset manager. So is there any data that supports this? And does this still hold any merit today? So there interesting little kind of catch phrases, right? There's a, interesting history to sell in and go away.
Juliana: It's actually very long dated. It goes back to, English high society in the 18th century for us, whether it's sell in May and go away or a Santa Claus rally or the January effect, these, these really feel more like novelties than any sort of real rule of thumb or true investing strategy. Vitaly was mentioning earlier, you know, the S&P 500 on average in any given year is up 9 or 10%.
So whether you're choosing to sort of speculate around some sort of seasonal trend, that's sort of one strategy. You can go with that. If you're if you're looking to compound your wealth and really build up your wealth over time, then I think the catch phrase should really be time in the market, not timing the market. And if you decide to sell in May and go away, we wish you luck in getting back in at the exact right time to make that trade worth it.
But for us, the compounding effects of the market over a long period of time are far more attractive and a much more effective investing strategy. If we all had a crystal ball, you know we wouldn't be where we are. but I really want to focus on the risks to investors, right? Like we hear these rhymes all the time.
Chiara: But at the end of the day, that's why, you know, financial advisors exist to help you stay true to that financial plan. How hard you think it would be to time going back in. I know you kind of alluded to that, but I really want to hone in on the risks that are associated with following these trends.
Vitali: Well, I think the risk is enormous. Or let me just flip that and say the probability of timing this, correctly is incredibly low. That's true for any set of market conditions. But unless you have, access to, I think, the president or his administration right now, this this is just, kind of a very foolish, exercise.
And so there's not much more to add than what? What? You know, Juliana said here about time in the market. And, you know, just maybe there is one thing to add. It's, of course, time in the market, as we said, in the right securities. Right. and this is this, this is the benefit of having that research and being able to have an opinion on if the world does go into, one of the many adverse scenarios that we can, forecast.
Well, we plan for those. Right. And so under those adverse scenarios, what would the portfolio look like? And that often looks like, it's often constituted from different securities. And of course, it would look like if we see the market going up. And so that kind of rigor in the work required behind the scenes, is, is quite significant.
Juliana: I would maybe just add on to that our philosophy as a team, we try to lean into long term secular trends that have you know, a durable path of growth over many, many years. And so I think that philosophy lines up really well with a time in the market versus timing the market type of strategy, where, you know, what our team does on the fundamental research side is look for companies that have exposure to these long term, slow moving thematic trends that will drive long term growth and tap into that through investing and really high quality companies that have a competitive advantage.
They have a strong competitive moat. They generate a lot of free cash flow. We believe the market's not valuing that free cash flow correctly. And so that's the sort of philosophy and rigor behind building a long term durable, resilient portfolio. So lots of strong balance sheets I here as we focus on some trends I know we have a team of 20 plus analysts working really hard trying to find these trends.
Chiara: Apart from focusing on tariffs, what are some emerging trends that, you know really excite you in the team? Is it AI? Is it the AI infrastructure? Bill talk to me.
Vitali: Eyes are to hard sell or Nick here are just before the show talking about the fad. That's sort of overtaken the society with the Studio Ghibli animations. And I actually, noticed my mother in law now changed her display picture on, online, to, to be that, animation. But I think it's been a little bit forgotten now, by the investing public.
Because tariffs of course, there's only so much mindshare that we can have in tariffs and politics, and they've completely come to dominate the worldview of investors right now. And it's creating opportunities because it's making the markets really sell stocks and ignore themes. namely the AI theme that we believe is in its early innings and is going to be a massive wealth and value creation, story for society as a whole.
Vitali: So, you know, that's one we kind of all can approach it in different ways. But of course, whether it's infrastructure or chips or software across that supply chain, you're seeing these stocks get hit very well. That almost if you were I kind of unassuming, just looked at the markets today for the first time. You'd say, what I am right.
I don't see it reflected in the stocks. And that that gets excited because as Julianna said, that when, you know, when things fall, it means you're getting a better value for something. And when you get a better value or great value for things that are literally transforming the world, that's fantastic.
Chiara: And do you still find there's opportunity in that second derivative trade of AI in the infrastructure build?
Vitali: yes. But depends which part of the infrastructure build. I think, Julianna might turn it over to you, because a lot of these infrastructure adjacencies are something you're very familiar with.
Juliana: Yeah, I think I think a lot through 2024, let's say a lot was swept up into the AI trade, where it became, you know, all of the picks and shovels and all of the power generation was all looped into the same trade. That was sort of an interesting period of time and made sense because I was a sort of longer dated growth driver for all of these companies.
I think if you look through some of those picks and shovels, there's still some really interesting opportunities where, you know, valuations probably became too extended through 2024, but you still have a really interesting medium to long term growth story for electrical content or for some of the engineering firms that build out these large infrastructure projects or help sort of step up Capex across utility companies that that provide the power for data centers.
So it's still interesting. We're kind of picking our spots more selectively there, but an area we still see some opportunity. So where do we see the market headed in 2025.
Vitali: Billion dollar lane dollar question? I think it goes back to what we've been talking about throughout this podcast, which is the world we're living in today under the present administration. And the policy setting is highly uncertain. And there are a number of paths that that the economy could take and the markets could take with them. Right. And some of those are very good.
Some of those are not so good. Now, we're lucky to be filming this, actually, now mid April, I'll just call it broadly without declaring the date. and I say we're lucky because the markets also had a, I think, quite a definitive declaration from the administration in terms of where, how far they'll go, right where they will respond to market forces, where they'll respond to pressure as things begin to kind of crack, under the stresses that they impose.
And that's critical because we talked about that pendulum of fear and greed and what we saw with that, you know, P uncertainty was just the kind of the market, the floor just falling out of the market, people going to sell everything. There was a real capitulating nature to those days. Right. And now that the administration has responded and said, okay, I think the line might be here, that gives the market a little bit of relief.
Now it's still down. There's still a lot of, you know, bad and good things that could happen. But the optimist in me says that that is the great reprieve that we receive that that it can now we can take our eyes off of, off of the off of the uncertainty and begin again to do what we do very well, which is position our portfolios with some of the best companies that we could find right now on sale, to make resist, Brazilian portfolios for, for our clients.
Chiara: so it sounds like there's a lot more bloom overdue. Is there any final thoughts you want to leave our listeners with today?
Vitali: You know, you might not like me for this, but I'm going to hammer home the same message that we've had throughout this podcast. And it's that in these extremely difficult, uncertain times, the value of professional management is greater than ever. And we're doing day to day is rigorous work to really understand how hundreds of different companies would perform in a variety of operating environments.
So I can't sit here and I don't think anybody can and tell you that, you know, Mae is going to be a great month for stocks, or July is going to be a poor month for stocks, but the GDP growth can even be 2.1 or 4.1 or whatever. But what I can tell you is the process that we follow.
we have been following it for decades, and it has led to a certain set of results. There are no guarantees in the market, but what we can promise to our investors, as we're going to keep following that process with the same rigor and diligence that we always have.
Chiara: that was a great way to end things off. Thank you so much, Julianne and Vitaly, thank you both for sharing your experience. It is clear that while we are here with tariff and economic challenges, may flowers can still bloom. For us savvy investors.
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