October 2022

Quarterly Market Commentary

Stocks and bonds sold off in 2022, but should rally in 2023 in our view. While 2022 was a year when a high cash exposure was warranted, we believe investors should be planning to return to a fully invested stance within the next several months. Investors should deploy cash opportunistically, buying the sort of price weakness that is typically seen as the Fed approaches the end of its tightening cycle. The September selloff in stocks and bonds has provided a good opportunity to begin that process, in our view.

A year ago, we began warning that stocks faced three problems in 2022:
  1.  bond yields would rise,
  2. earnings growth would slow, and
  3. many sectors were expensive relative to bonds.
Given these concerns, our strategy since last fall has been to hold a higher than normal cash balance to take advantage of market volatility with a series of ‘buy the dip’ trades.

It has been our longstanding view that it would take a fed funds rate well above 4% to shift the outlook from a soft landing to a hard landing. The economic recessions in Canada and the U.S. we now expect should be mild for several reasons. Consumers still have substantial excess savings accumulated in the first 18 months of the pandemic. Corporate balance sheets are in good shape with less debt and much more liquidity than seen in past recessions. Many companies remain understaffed and will not likely trim payrolls even as the economy slows. Canada and the U.S. are self-sufficient in energy and therefore much less affected by higher energy prices. And while higher interest rates might shorten the long line up of customers seeking a new vehicle, auto companies will continue to sell every vehicle they are able to produce suggesting auto production will remain firm rather than declining as seen with past episodes of fed tightening.

Two themes that have served us very well this year are stock buybacks and dividend increases. A stock buyback occurs when a company buys back its shares from the marketplace with its accumulated cash. Most of our current holdings have been actively buying back their stock and increasing their dividends. If a company is performing well and cash flows are improving, there is more room to pay shareholders higher dividends. In this context, a dividend hike is a positive indicator of company performance. During the past quarter, Crescent Point Energy increased their dividend again this year and they raised it by 23.1%. First Capital increased their dividend by 100%.