Q3 2025 Market Outlook with Keith Allan

Speaker A: Foreign. Compelling guests, valuable insights, and time well spent. Hello, and welcome back to the Polestar Podcast by Velo Wealth. I'm your host, Kevin Parton. I'm a partner here at Velo wealth, and this is our quarterly market update where we're speaking with portfolio manager and Velo partner Keith Allen. Good to have you back, Keith. How are you doing?

Speaker B: Hey, Kevin. I'm doing well. Thanks for having me.

Speaker A: Always good to chat with you. As I always say, I get the privilege from most people's perspectives of getting to chat with you a lot over the course of the year. But, uh, this is a great opportunity to summarize what's happened in the last quarter for everybody who's interested and how that kind of reflects your perspective going forward and answers maybe some questions that people have. So we are now into the fourth quarter just having wrapped up Q3. This year has been like many other ones, full of surprises and things have been interesting. While at the same time, I think the first thing we wanted to do was go back to some of the stuff we talked about at the beginning of the year. It also feels like war. Surprises to some people weren't really surprises to us or to you based on how we started the year. So maybe let's start with that. What, uh, were we talking about at the beginning of the year as far as what some expectations were coming into 2025 and the first year with Trump as president? Sort of a big headline that we thought were going to come to fruition that have so far.

Speaker B: Yeah, I guess. Well, I guess the first year of his second term, we did see four previous years of Donald Trump as president, but the first year of his second term. Yeah. So I think this will be our, um, fourth, third iteration of this podcast for this year. Third or fourth? I can't remember now, but I know in the previous few, we spoke about kind of expectations and really touched upon some of the trepidation that investors had, you know, especially in the spring. Right. Coming out of Q1 into Q2, um, when we did see markets sell off a little bit and there was a lot of pat. Actually, I don't even want to use the word panic, but there was some trepidation. Just, just, you know, nerves were kind of at an all time high. Anxiousness amongst investors. And, you know, one of the things we spoke about back in that podcast at the end of Q1 one and again at the end of Q2 was just to kind of like, let things play out. And I was, you know, I was steadfast in what I had to say in the sense that, you know, I think when everything's said and done, we'll see a Trump presidency be good for capital markets. And you know, I was still bullish on what 2025 had in store and you know, kind of felt like that was just a small sort of blip in what we would see. And you know, I think for our clients and those that rode the market out and kind of just didn't hit the panic button and kind of move to cash or move to real safe haven assets, they've reaped those rewards for 2025. Like the markets have done incredibly well. We've seen a really strong bull market sort of continue from, from what we saw the kind of post 2022 here and, and to continue to, to sort of add more fuel to the fire, so to speak, in terms of markets taking off and those that remain invested in risky assets, especially equities, have seen tidy returns in their portfolio.

Speaker A: Yeah, I mean it's been stellar year and even just looking back at the couple years that I've been at the firm and my clients portfolios, outstanding returns and so to that end time in the market always outweighs timing the market and you can't predict at uh, least no one's done a very good job of it so far of predicting what the future holds even when you think you know what the cards are. So this has been a really good year for an equities market. There's, I mean notwithstanding, today was an exciting day in the markets. Never to be a dull moment, but we'll circle back to that later. There's some things that are going on right now that might be like we talked about, might be honestly of concern or of interest. So things like valuations being stretched, inflation, what's going on with that, interest rates, what direction are they headed in and what does that likely mean? Unemployment, uh, uh, what does that look like and how does that impact things? So we'll start with kind of those four and work through them Right now for people who are having questions around valuations of companies or talking about, you know, valuations being at all time highs and using that as an indicator for whether there's going to be a pullback or what that looks like. What are some comments you have around current valuations being stretched and do you think that the data supports more growth in the market or stagnation or even a pullback?

Speaker B: Well, there's no doubt that like equities as an asset class remain priced above historical norms. Right. Like if we look historically what. And we could talk about PE ratios or price to book ratios or all the, you know, the ratios that you hear about on Bloomberg TV or bnn. And yeah, valuations are stretched. Those metrics are higher than what would be considered normal. And by that argument you would think that we're sort of ripe for a pullback and we very well could be. You know, that said, ah, like I think there's still a little bit of Runway left in this bull market for a number of reasons. Number one, you know, I think that there seems to be heavy retail participation in the market. So like a lot of people are just. There's a lot more investors and a lot more sort of funds flowing into the stock market, if you will, which has sort of kept it up and has the, you know, potentially the tendency to allow it to continue to rally here when you see more cash flow coming into equities as an asset class. I think I sort of come back to tech all the time. There's so much room. I think despite the valuations, despite what you read and what you hear, I still think there's room for growth in the AI space and in tech as a sector. And we've talked about it before, before how technology makes up such a huge component, especially like the US index, right? The S P 500 and the, and, and, and the Dow and, and all the US Indices are so heavily relying on tech. Not so much in Canada, right? Katana's more Canada is more materials financials. But tech in itself is such a huge component and as long as that continues to drive those indices like we will see the market do really, really well. I mean there is a slight difference dislocation between the market and, and the economy. And I've talked about this before, how people have a tendency to relate the two and say, hey, look like, oh, the economy's doing poor, the market must be doing poor. The, the economy's doing well, the market must be doing well. And there is an argument that can lead to that. And yeah, like there, there is some correlation like, but I, I hate to say there is a positive correlation between the two because if the market goes up, doesn't mean the economy is really strong. Strong and vice versa is the economy's doing really well. It doesn't necessarily mean the market's going up and we are seeing a dislocation right now of, of what the economy is showing us and what the market is showing us. And, and that is. Doesn't mean like it's wrong. It just means that's what it is, right? Because we are seeing in, in the economy, like, like the, the labor market is softening. Like if there's a weakening of the labor market and we are seeing higher unemployment and we are seeing, although inflation's not where it was a year ago or maybe two years ago. Like there are, you know, reports where you see inflation slightly creeping up. Right. And, and does that mean what is going to happen to interest rates? Like, are we gonna. Like we did see an interest rate cut this past month. Um, and, and all signs point to 100 chance of an interest rate cut again in October. But, you know, now I'm hearing maybe that's not the case. Right. Like, even though, like two weeks ago it was a certainty, I, uh, I wouldn't say it's an absolute certainty that about we're talking going to see an interest rate cut. Like, do we need more liquidity flowing into the market, which obviously will increase inflation and the more spending, the higher the prices will rise and so on and so forth. So there is a dislocation between what we're seeing in capital markets and the economy as a whole. And that's not to be unexpected. Like, that's not totally out of the norm of what we've seen in the past. It's just. That's the way it is. And yeah, I mean, I think touched upon interest rates there. Like, we saw a cut last month, we figured we're going to see a cut again. We may or may not. You know, depending on how things unfold over the next three months here, we may see another cut early 2026. But I mean, it depends. And that's the best answer I can give. Like, it just. It depends on a lot of things, right?

Speaker A: Yeah. Which is fair. And I think, I mean, to your point, right, if the economic state gets worse, then interest rates coming down generally supports economic growth, which is what you want to see at that level. But then all of a sudden you've got more capital that can go into the markets. And so we may see a further bull run. I think sometimes these moments seem to sort of be, uh, those who hold assets build their wealth. Those who don't hold assets are experiencing the opposite. And that may be one of those things. And I also wonder too, right, if more of the money going into the market or in the market right now is held by a smaller number of people or institutions. They're not dependent on a good economy for their wealth. And so that's where the market might diverge from the broader economy, which represents the Average. Whereas the stock market might represent a smaller segment of the economy. And that's to uh, me in my experience, where kind of those things are. So helping people understand, and these are conversations we have with clients is just because there's economic uncertainty doesn't mean we're trying to time the market or to pull money out. And those who might have thought about doing that earlier in the year wouldn't have had the benefit of the upside that we've experienced.

Speaker B: Yeah. And just to add to that, like the three, basically the main themes of what we're seeing from clients right now is like, do I go to cash, Do I rebalance or do I just stay the course? And I think the biggest thing or, uh, the most important thing we can do as investment counselors is ensure that a. Again, I've talked about panicking and making emotional decisions and we want to remove the, the emotion from the equation. That's, that's our job when we meet with our clients. But I think, I think the worst thing you can do well in all aspects of life, but investing especially is lack preparation. And I think like, okay, we've seen today, right, the markets, I would say this week, I wouldn't call it a sell off, but the markets have, you know, kind of got, well, they've gone down. Right. Like today's not a great day. We've had a couple down days this week. Is this the beginning of what we're going to see in terms of a massive sell off? I'm not convinced. I mean, I do think we will see a pullback at some point. I mean, the music's going to stop, but we don't want to be left without a chair. Right. Like we want to ensure that we've prepared properly, we've prepared our clients portfolios, we've prepared expectations and you know, go to cash. No, we're never going to go to cash. That's not our mo. We don't. Yeah, uh, cash is an asset class class, but we don't go to cash. We might increase the cash waiting in our clients portfolios if we think, you know, there now is an opportunity to take some off the table to maybe increase our cash percentage from, call it two and a half or three to five to seven percent. But like going to 30% cash is never an objective. Like there's other opportunities to make returns in this type of market. Should we rebalance? Absolutely. We should always be rebalancing. Like our objective is, you know, whether it's a bull market, a bear market, a flat market, like we're always going to be rebalancing our clients portfolios. Stay the course. Yeah, to some respects, we do want to stay the course. Like, we want to have a plan. We want to put that plan in place and we want to, we don't want to drift or tilt away from that plan. We, uh, you know, we might want to pivot at some point, but for the most part, we want to stay the course. So I think the answer to all three of those questions, which we've sort of been seeing from clients, is yes to all three. Like we're going to, we're going to go to cash, but we're not gonna go to cash. We're gonna increase our cash, perhaps, but we're never gonna go to cash. Yes, we're gonna rebalance and yes, you want to stay the course because the course is the plan that you've put forward. And I think that's really what we're trying to, you know, hammer home with clients and make sure that they understand.

Speaker A: Yeah, and it's, it's the frameworks of making those decisions. Because when there's big market moves, when there's political unrest, when there are things that, that create emotional reactions inside us and the people around us, we're drawn to make emotional decisions. And so if we have these frameworks, which is percentages of cash or fixed income or equities, and they're tied to your own comfort level, your risk profile and your goals, then you can keep sort of the bumpers on the bowling alley lane and sort of move within it, but you don't make too many drastic swings. And again, that's what we're doing with clients is we're making sure that your investments are aligned with goals and we understand your comfort level and these frameworks are in place. And it seems simple enough when we're doing it on a regular basis, but I think this is where a lot of people sort of navigate uncertainty, is feeling like they don't know what to do in each of these moments. I do want to point out real quick here, you mentioned a couple different options, whether it's, you know, stay the course, rebalance cash. But gold seems to be, especially over the last 24 months now, a major topic of conversation. It always sort of fits itself in there as far as like hedging, but it's a top performing asset, maybe for the first time in its long history, but across the board and it setting new records all the time. What are your thoughts around gold as an asset to hold? What are your Thoughts around how it's performed over the last little while and what do you think it's indicative of?

Speaker B: Yeah, so that's, it's a really good question. It's one, it's, it's a, it's a topic of debate. It's, it's one that, you know, like people that love gold love gold and people that don't necessarily love gold, they don't love gold. And uh, it is one that you can, you could debate and talk about. And you know, I, one question I get a lot is from people is like, what about precious metals? What about gold? And so there's a few things I, I can make a bearish case for gold and I can certainly make a bullish case for gold. And the answer probably lies somewhere in the middle as it normally does. So first of all, I will preface what I'm about to say is that I do believe gold, gold as an asset class should be included in everyone's portfolio. Absolutely. In terms of asset allocation and diversification and ensuring that you have uncorrelated assets to your traditional equities and fixed income and cash, like gold is the same thing as real estate, as uh, any commodity, as private equity, private. Like it should be a part of your overall portfolio. I, I fully support that. Now, should you have gold as the entirety of your portfolio? Absolutely not. And, and this is an argument I had actually in the summer, um, my dad and I were up playing golf up in Whistler and my uncle were up there and we had this debate about gold as an asset class. And look, I mean gold's $4,000 an ounce right now. It, it has done astronomically well. Like it has taken off and it's done well. But the thing about gold, there's a few things about gold, right? Number one, it's hard to value because when you talk about valuations and like finding the valuation of a stock or even like a real estate asset, like you can discount future cash flows to determine a present value of any asset, right? You just take the future cash flows, find a uh, interest rate, discount those future cash flows back and you've got effectively what the present value of that asset is. Think about gold is, it's a non yielding asset, right? It doesn't yield anything, it doesn't yield cash flow, it doesn't produce anything. It's a store of value. So, so to try and determine what the present value, what the actual fair value of an ounce of gold is, is very difficult because there are no cash flows to discount. It's effectively what someone's willing to pay for it. So it's what I'm willing to pay for your ounce of gold. And that's dictated by what's going on in the world, like what the geopolitical climate, what other assets are doing, how people feel about gold. And it's somewhat arbitrary because it is what I'm willing to, to pay for it. Even, even a real estate. Even if you owned a complex of apartment buildings or an apartment building and you could predict what it's worth because you could say, well, I'm going to up the rent x amount per year for the next whatever years and I can discount that back. And you can sort of get a feeling for the cash flow those apartment units will produce. But again, you can't do that with gold. So the value is somewhat arbitrary. So is gold worth $4,000 an ounce? I don't know. Is someone willing to pay you $4,000 for an ounce of gold? Then that's what it's worth. So yeah, I can guess it is. But the reality is, is that because it has grown so quickly and by so much statistically and all the metrics which suggest there will be a pullback at some point. And like with any asset class, my advice has been and continues to maintain is like, take some profit off the table. There's no reason why you can't. If you've made a lot of money in gold, like there's no reason why you can't take some profit off off the table and reinvest back into gold. Like if you think it's going to go to $6,000 an ounce, okay, great. Like take your profits now, buy it back at $4,000 an ounce and let those profits ride and see if it can go to $6,000 an ounce. Maybe it doesn't, but at least if it drops to $2,800 an ounce, like you took your profit and you didn't get stuck without, you know, getting those gains and diversifying your portfolio. So there's a few things I want to talk about with gold. Why do people like gold? I'm just going over my notes here. So people, people like gold because it is a, it's uncorrelated to traditional assets. So you know, it doesn't necessarily move with equity markets or fixed income markets. It's, it's a hedge. Right now you can get exposure to gold by investing in gold companies or gold stocks on the TSX or, or in, you know, in the United States. And um, those have more of a traditional like correlation Right. Because like they're a stock you hold like a gold producer, like um, you know, Barrick or whatever. And so that's going to tend to have a tendency to move with the market as opposed to holding like physical gold or synthetically holding it through an etf. Like okay, so that's one thing, number one, is in a lower interest rate environment, like gold is more attractive, right? Because I talked about it being a non yielding asset. Well, in a low interest rate environment you're not getting those yields on bonds or U.S. treasuries. So it's like, okay, well I'm giving up a little bit of yield because you know, maybe I get a GIC or some sort of treasury at a, at a low yielding thing, but there's no capital appreciation, whereas I can get that capital, appreciate my gold. So it is more attractive, right, In a higher yielding or higher interest rate environment. Not necessarily as, maybe not as attractive, you know what I mean? Because you can get your, get that yield on a bond or something else and you're getting that cash flow. It does act in sort of these uncertain economic times or these, this political uncertainty, this, that we're experiencing. People like it because it's safe haven asset, right? When, when you have, you know, world wars and it looks like things are somewhat settling down in the Middle east. But you know, you've got what's going on in Ukraine, you have what's going on in the Middle east. You have what, you know, this tension we're seeing in the United States and all these like geopolitical events and it's like, hey, gold has withstood this test of time. So people like it from that aspect. It produces alpha and volatile markets. It is a real asset. It's, it's something you can touch, it's tangible. So in that respect it can keep up with inflation. But again, it's only worth the price, what someone's willing to pay for it. So if all of a sudden there is trepidation or if the masses feel that it's gone up too quick, too fast and all of a sudden it's like, nope, we're not willing to pay $4,000 an ounce anymore. You could see it very quickly drop and drop substantially. So there is always that concern. So, so again it's great to take some profits, but there are some tailwinds, certainly some tailwinds that gold is going to rally even higher. Um, so where is it going to go? Is it going to go to $5,000? I have no idea. I have no idea. If it's going to go to $5,000 an ounce or $2,800 an ounce, all I know is that people that have been invested in it have done really well and it probably makes sense to take some off the table at this point. Now, on the bearish side of things, or the pessimistic view of it, the fact that it has stretched so quickly, there's some technical analysis that I don't really want to get into because I'm sure our listeners don't really want to get into the sort of the nitty gritty quantitative analysis. But there are some technical analysis, uh, that suggest that it has sort of reached its max. There's a strength index where typically when any sort of asset reaches over 70, it would be a sell. Gold as an asset class right now is at 71 and the TSX mining stocks are at a 78, which suggests both have sort of exceeded that stress index and that it may be a time to take some money off the table again. The fundamentals, uh, of gold bullion are tricky. But you know, gold stocks and gold producers have very highly stretched valuations at this point, which suggests that they would be overvalued and you may want to take some money off the table there. And just again, as a general asset class, seeing something go up that quickly would give us the idea or the thinking that, hey, look, maybe I want to diversify a little more. But you know what, it's done well. I tip my hat to those that invested and have done well to our conversations earlier in the year. Our biggest thing with clients is, hey, best to diversify asset allocation, diversification. These are the things that we really stress with our clients. And with gold, it's no different.

Speaker A: Okay, well, I think sort of to bring all of this full circle, some of the key things that came up over this call were at the beginning of the year, there were some predictions about what was going to happen. Big picture, the market's up and that was something that you thought was going to happen. It's impossible to predict what's going to happen along the way. There was a big pullback in April that wasn't necessarily anticipated, at least the timing of. And it recovered and has recovered quite substantially since then. So making sure that you stay invested. But to stay invested isn't just pick a stock and ride that one stock. It's to have good diversification. What's the framework that's being used to build your portfolio and to rebalance it? What do you have in cash and not sitting all in cash because you're scared. But a certain percentage, and what's in fixed income and what are in alternatives and what's in equities, and how is that being selected? And who's watching that for you? You know, what I've heard a couple times in this call, Keith, is that there's a lot of analysis that goes into these things, into the decisions of what's held in a portfolio and why. And so none of this is just happenstance and just, oh, we had a good year. We don't know why. So the framework of how that gets picked, the rebalancing, the staying the course, um, you know, and all of these are different asset classes. So we're not an advocate for market timing. We're not an advocate for swinging in either direction. We're looking at good asset allocation. What do you hold? Are they good assets? What percentage do you hold? And as the markets fluctuate, as they invariably will, are you rebalancing? And then, by and large, do your investment portfolios align with who you are as a person and the goals you have? So as we sort of finish all of these calls with, it ends up being a lot of a lot of that conversation. There's lots of noise in the market. There's lots of things that people want to know about. But at the end of the day, do you hold good investments, good assets? Is there a good mix? Are you diversified and are you rebalancing? And how often are you having these conversations? Our clients, courtesy of the hard work that you're doing as well, Keith, are having a really, really good year. Uh, and we like to make sure that that tends to be the case. So we'll call that this quarterly market update. Thanks, Keith, for all of your insight on everything that's going on. Let's hope for, uh, a strong finish to the year. In any case, we'll get together again in January and let our listeners know what happened in Q4.