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Well, what a great time to have Don Villalobos join me. He's with timingthemarket.ca. But why? In case you're not familiar with his work, he has this whole approach that's first with cycles and then seasonality. And for example, we're in a season right now. We're in the presidential election season. That's the overlay. And then we can talk. We'll drill down into what happens in the particular months, the summer, individual stocks. Don does timingthemarket.ca. Don Villalobos, thanks for taking time with me.
Thanks for inviting me, Mike. Well, Don, let's start with the presidential cycle. I mean, obviously, it's on people's minds, you know, the big debate on Thursday and all the talk about it since. So, you know, is there sort of a trend that we can sort of start with? It's not the definitive, but it says, what are the sort of kind of tendencies when you get into the year of an election?
Historically, during the launching year for the president, the markets moved significantly higher from approximately the last week in June right through until about the middle of August.
And that has worked out on average return about 2.5% per year. So a pretty good chance that we'll see something like that again. That fits in with the regular seasonal cycle where 15 of the last 20 periods for the month of July, the S&P 500 has moved up significantly.
So you look at those two things and all we're trying to do is put the probability of, you know, making money in our corner, you know, as you say. So you add up both of those and, you know, puts a checkmark by the list, you know, there. Let's talk a little bit further about the summer and the summer movement. I mean, there's that famous saying that says, you know, sell in May and don't come back till Labor Day, you know. So that's another one of those sayings that has a lot of validity in sort of history.
That's true. But remember, this cycle happens every four years for the Christmas cycle. And there are certain sectors which tend to do very well during this period in March, I mean, in July. A good example, something else happens during presidential election years. And that's the Olympic Games happens every presidential election year.
And historically, there are certain sectors that do very well in the summertime in a U.S. presidential election year. Most notably, the consumer or the communication services companies, companies like Meta and Comcast and companies like that, their stocks normally do very, very well in the month of July.
That's fascinating. I hadn't even thought of, of course, as soon as you say it, I know the correlation or the relationship. I mean, yeah, the Olympic Games, the summer games coming up, you know, in July in Paris, of course. But you sort of go, oh, yeah, that's every that happens every election year. So interesting to see there's a pattern that develops out of that, or at least there's some core relationships there.
The key is we see the correlations, but the reasons for it happening are usually fundamental reasons. The question is, will the fundamentals there this year to cause U.S. getting in equity markets to move higher into the month of July? And the answer is yes, there is.
Oh, as you say, I mean, in this case with the Olympics, I mean, it's got to help the travel season. That's for sure. And communications, you say that people who are broadcasting now, of course, expanded the social media. That's got to be big time in that. So, yeah, kind of interesting the way that relates. And as I say, it fits your seasonality pattern, though, too, when we look at that.
That's correct. The key this year is earnings coming from major Canadian and U.S. companies. Yet the earnings for the S&P 500 companies look for a big surge in earnings gains coming into the second quarter. Of course, those results will be reported sometime in the month of July.
On average earnings are in the second quarter where the S&P 500 companies are expected to increase by about 8.8%. That's versus only 5.9% in the first quarter. So we have an acceleration in earnings gains coming our way. Let me move to the TSX for a second here. Is it sort of a similar kind of positive seasonality?
It does, and this year in particular, it looks particularly promising in certain sectors in the Canadian market, most notably in the natural resource sectors.
If you look at the natural resource companies, whether it be in gold or base metals or energy, all of them are expected to report significantly higher earnings coming into the second quarter. Earnings, for example, for the energy sector are expected to be up about 16%. Earnings in the base metal sector are expected to be up 20%.
Earnings in the gold and silver areas are even going to be better. For example, silver producers, earnings are expected to be up about 29% on a year-over-year basis. Added to that is currency. The Canadian dollar has been significantly weaker than the U.S. dollar over the past year. In fact, the U.S. dollar relative to the Canadian dollar is up an extra 8%.
Now, you translate that into the earnings of these natural resource companies, and you see some significant earnings increases coming into the second quarter. So you've got, of course, if you're operating in Canada, your costs are down versus the U.S., but of course, commodity prices are measured in U.S. dollars too, so that's not a bad formula for making a little bit more money. Sure, but it is interesting, like music to my ears when you start talking commodities and oil, because
I'm very comfortable with the demand long term. We're talking shorter term here, but demand long term is going to be there as purchasing power continues to erode in all the paper currencies. So yeah, I got a little smile on my face when you say that.
It's getting lined up quite nicely. But even today, we had some encouraging news from the states, which will help both Canadian and U.S. stocks. And that's the PC price index that came out last. Historically, if it's heading higher, that's bad for equities. But when they're trending lower, that is very, very positive for equities because it sets the scene up for the Federal Reserve to consider reducing interest rates coming into the second half of this year.
We saw the PCE price index on a core basis drop to 2.6%. That is setting the stage up for the Federal Reserve to reduce their Fed fund rate probably by September of this year.
Wow. And that's interesting. Of course, that's a really hot debate because will the Federal Reserve keep an eye on the federal election and maybe not want to be seen as influencing it either way, I guess, you know, but I mean, and that's back to that presidential cycle in terms of, you know, the attention that pays in the market, like the uncertainty coming out of that debate is huge.
it's going to be Donald Trump, but versus who, you know, so, you know, that adds to it too. I mean, it's, I guess it's the, I don't know if it's recency bias on my part, but it seems like, you know, that old sign on the stock exchange in New York, gosh, when I was there 30 and 40 years ago was now is always the most difficult time to invest, but it seems like balancing. And that's why I like things like to see what you are sort of traditionally historically has the
the pattern been in your favor if you do X or Y? Then you drill down, of course, with timingthemarket.ca, and I'll tell people that's absolutely free. Just put in timingthemarket.ca, your commentary on a daily basis there, different markets, different sponsorships,
specifics in there. When you're looking right now in the market, and I get you to reiterate to some degree though, so which sectors would I be focusing on if I want to get long here as we enter this positive season in July?
In the case of the US, look at the communications services sector. The easy way of doing that is there's an ETF, the symbol is XLC. In the case of Canada, look at the natural resource companies in general, because they're all going to show some very, very strong second quarter results over the next month or two.
Okay, so this is really crystal ball time on this way. But again, it's hard not to be thinking the presidential election because we've got the primary, not the primaries, pardon me, we have the conventions coming up. They're going to be part of this session. Obviously, the vote. What, again, what are the probabilities for after the election? What's the first year of a new presidential cycle look like generally?
Historically, in the first year after the president is elected, you see equity markets in the US go significantly higher because by then the president, whoever he happens to be, will set his agenda and will start doing the things that he thinks are going to help the economy. That's a good sign for equity security prices going forward. Yeah. Well, as I say, I'm not going to... Well, I will hold you to that as the general because that's what's happened in the past, but we'll visit with you again before that.
you know, to get an update from you. So in parting, Don, you're positive on the equity outlook. You know, this is the time to sort of get interested. Do we get nervous again in the fall?
Historically, markets during the presidential election year do well in the month of July, right through until the middle of August. Then they go into a corrective phase prior to the actual election itself. When you get into October, and from the beginning of October right through until the end of the year, equity prices in the U.S. in particular go significantly higher.
Well, that's a great roadmap, but people don't have to wait to visit with you again. They can go to timingthemarket.ca. Don Villalo, thanks for finding time. Thank you, Michael.
