Quarterly Thoughts

In late 2024 I wrote a letter sharing how dips / corrections / pullbacks in the market have always been an opportunity and 10% corrections typically happen once a year. In April, at the time of writing this, we were in the midst of one of these 10% corrections. Things have changed materially since then.

In 2024 the North American markets provided healthy rates of returns. It was kicked off mid-year with interest rates dropping in Canada and the US while signaling more rates cuts to come, as recent inflation indicators were coming in favorably. With the markets anticipating a Trump win in the US, markets rallied near the end of the year and into the first few weeks of January.

In the face of permanent uncertainty, most world markets are marching to new highs. How does this happen when wars, dramatic elections, strikes and all the other seemingly negative events dominant the headlines? With rates dropping and inflation lowering, this has provided a catalyst for the companies that make up the market to earn more profits fueling their share prices. Remember the stock market is just a place where people buy and sell businesses.

Central banks around the globe are set to continue interest rate cuts this fall ending an era of high borrowing costs and savings rates. This month it is expected that the US Federal Reserve (Fed) will join others in cutting key rates. Rates that have held at levels not seen since before the Financial Crisis of 2007-2008. 

For the first time in more than 4 years the Bank of Canada cut interest rates by .25%. The drop in rates was somewhat expected by the market, but not fully, as the interest sensitive sectors of our portfolio rallied on the news. Dividends and dividend paying companies became more attractive as the rates on the alternatives lowered. Real Estate, Utilities, and Infrastructure are just some of the sectors that benefit in this type of environment.

I’ve always said there are 2 types of forecasters, the ones who don’t know and the ones who don’t know they don’t know. For some reason one who makes a prediction often tends to look smarter than one that doesn’t. I often get asked what things will look like going forward and how we’re going to do. Truth be told I have no idea. This is why you’ll rarely hear me make a prediction on the future.

The underlying strength in the economy and stubborn inflation has tested the patience of central bankers in Canada and the US on whether interest rates are high enough. Increases of the past 19 months tend to hit the economy with a lag and it might be just starting to show the effects.

Rising interest rates effect everyone whether you have debt or are trying to make the best investment decisions. Until recently the trend since the early 90’s has been one of lowering rates and many of us wouldn’t recall a time when rates have moved higher this aggressively. The reason is well known although inflation is showing signs of abating in turn the need for further rate increases.

Hard to argue that investing isn’t at times emotional. The media, market volatility going up and down and the pressure of making sound investments decisions can trigger emotions even for the seasoned investor. Many argue that the markets are rational but how could that be given that many of the people who participate in them aren’t? We all have investing blind spots.

I thought I would use this as an opportunity to share some of the most common questions that I’ve been receiving lately from clients. It is a busy time both economically and financially with those landscapes changing rapidly. I believe, now more than ever, it’s important to stay focused and to look beyond all the noise, as difficult as that may be.

Many of us are planning for what lies ahead over the next year. Maybe it’s a renovation project, a long- awaited trip, or perhaps visiting with family or friends you haven’t seen in a while. What tends to disrupt these plans is the unexpected. Emergencies, varying from a weather event, medical issue or someone’s passing, are generally unanticipated.

Admittedly, I struggled with what to title this letter. I had "Blocking out the Noise", "What Ultimately Matters" and "Dividend Growth, the Inflation Fighter" but ended up with the above. The word volatility is often used as a substitution for the word risk, but I'll explain shortly why I think they are almost opposites.