'Turn off all the noise and continue to be very poised and deliberate in your investment': Belski

Key Concepts

• Market Broadening: A shift from concentration in a few large-cap stocks (particularly technology) to more widespread participation across different sectors and market capitalizations (small-cap, mid-cap, value, financials, healthcare).
• Earnings-Driven vs. Multiple-Driven Markets: Markets driven by company earnings growth versus those driven by expansion of price-to-earnings (P/E) ratios.
• Dispersion: The increasing difference in performance and fundamentals between individual stocks, indicating a move away from correlated movements.
• Goldilocks Economy: An economic condition characterized by moderate economic growth and low inflation.
• SMA (Separately Managed Account): An investment account managed by a professional money manager on behalf of an individual investor.

January Market Review: A Broadening Phase & Focus on Fundamentals

The interview with Brian Bellski, CEO and CIO of Cumulus Investment Strategies, centers on the market dynamics observed in January and the anticipated shift towards a more fundamentally driven investment landscape. Bellski characterizes January as a period of “broadening out” across North American markets, a positive sign indicating a healthier market structure.

The Shift from Multiple-Driven to Earnings-Driven Markets

Bellski argues that markets are transitioning from being driven by multiples (P/E ratios) to being driven by earnings. He notes that while earnings-driven markets may exhibit lower overall returns, they are also less volatile and encourage investors to focus on underlying company performance rather than momentum. He states, “as we move more into earnings driven markets versus the multiple driven markets that we've seen…the return structure of those markets are much less, but they're actually more volatile.” This shift is viewed as a positive long-term development.

Drivers of Market Broadening & Dispersion

The broadening phase is primarily driven by dispersion – the increasing divergence in performance and fundamentals among stocks. This is particularly noticeable within the technology sector, where the performance of the “Magnificent Seven” (or top 10 S&P 500 stocks) has begun to vary. Investors are also increasingly focusing on areas previously overlooked, such as small-cap, value, dividend growth, financials, and healthcare. Bellski explains dispersion as “it just means that not all stocks are created equal, uh, and that you're starting to see differing parts of not only performance but fundamentals.”

Historical Context & Potential Duration

Bellski draws parallels to the mid-1990s, a period characterized by earnings-driven markets preceding the tech bubble of 1998-99. He anticipates a return to more “normalized trading” patterns. While acknowledging the possibility of a “Goldilocks” economic scenario in the near term, his outlook isn’t predicated on Federal Reserve rate cuts, but rather on continued earnings surprises – specifically, double-digit earnings growth. He believes stocks are beginning to “grow into their multiples” rather than being solely driven by multiple expansion.

Canadian Market Specifics

Regarding the Canadian market, Bellski highlights the importance of the banking sector. He believes Canadian banks have the potential to grow into their multiple expansion, but advises investors to be selective and not simply own all of the “Big Six” banks. He suggests overweighting one or two banks based on individual fundamentals. The materials sector is also noted as having strong earnings growth, but potentially facing challenges in sustaining its current multiples.

Small-Cap & Mid-Cap Performance

Small-cap and mid-cap stocks have recently experienced strong performance, a key component of the market broadening. Bellski believes this outperformance can continue, driven by “performance begets performance.” He points out that while the Russell 2000 (US small-cap index) has a reputation for containing many unprofitable companies, the S&P 1000 (mid and small-cap) companies exhibit strong cash flow, earnings growth, balance sheet strength, and revenue growth. Cumulus Investment Strategies manages a small/mid-cap SMA portfolio for clients, reflecting their bullish outlook on this asset class.

Investor Strategies: Discipline & Focus on Fundamentals

Bellski emphasizes the importance of investor discipline and a focus on fundamentals. He advises investors to:

• Ignore political noise: Don’t let short-term political events disrupt long-term investment strategies.
• Buy good companies: Focus on companies with strong fundamentals.
• Be disciplined: If you believe in a company, buy more when it underperforms, rather than selling. He uses Kushtard and Waste Connections as examples of fundamentally sound Canadian companies that may present buying opportunities.
• Manage risk: Take some profits when markets become overly optimistic, but remain invested.

Data & Statistics Mentioned

• Earnings Growth: Expectation of continued double-digit earnings growth.
• Russell 2000: Historically, a significant portion of companies in the Russell 2000 have not been profitable.
• S&P 1000: Mid and small-cap companies within the S&P 1000 demonstrate strong financial metrics.

Conclusion

Bellski’s analysis suggests a significant shift in market dynamics, moving away from the multiple-driven gains of recent years towards a more sustainable, earnings-driven environment. This broadening phase presents opportunities in previously overlooked sectors and market capitalizations, particularly small-cap and mid-cap stocks. The key takeaway is the importance of disciplined investing, a focus on fundamental analysis, and a long-term perspective, ignoring short-term market noise and political distractions.