November Month End Commentary

Just like the wind, the markets can change quickly and where it was once extremely negative, a few news events can change market sentiment. October and November have been quite volatile with inter month swings of over 4%, with the US midterms, tariff fears and US interest rate policy all weighing on market sentiment. In the last week, it has seemed that all of these issues have progressed towards a resolution, with the Democrats regaining control of the US House of Representatives in the midterm elections, China and the US agreeing to a ceasefire over the weekend at the G20 meeting in Argentina; and last Wednesday, Fed President Jerome Powell had dovish comments in a speech, indicating that current interest rates in the US are “just below neutral”. With these events over the last few days, the markets have rallied close to 6% in the US and 4% in Canada.

A part of our investment process is to try and not overreact to bad news and there is feelings of contagion in the markets and not overreact to good news when there are feelings of exuberance. Even though the markets are more and more controlled by computers and passive investments like ETFs, they still exhibit human emotion and decision making when they are overbought or oversold. As result, we prefer to weather these periods of volatility as you never know whether the next news story will result in a change of sentiment and by how much. It has been proven that it is almost impossible to time the markets and to sell at the top and repurchase at the bottom, due to a variety of different biases that we bring into our investment decisions as humans. We tend to believe that when the sentiment in the markets is bad or if the sentiment is good that these trends will last in perpetuity even if this may not be correlated to the underlying fundamentals in the markets. The first move in rebounds in the markets tend to be the most violent and to perfectly time the markets you must have purchased BEFORE the catalyst for sentiment change, this is almost impossible unless you have a magic ball.

2018 has been the most volatile year over the last few years, and we expect that this volatility will continue to persist into 2019 as the markets continue to digest the actions of President Donald Trump’s administration, rising interest rates worldwide, slowing but still positive economic growth, and high expectations on companies to increase both their revenue and earnings, not just cut costs and repurchase shares to hit their earnings guidance. This last decade since the 2008 recession has been dominated by CEOs worldwide being good custodians of capital, hoarding cash (Apple comes to mind), and using excess cash to repurchase shares instead of invest in their own future revenue growth.

As our focus begins to turn to the third decade of the 2000s, we believe that this sentiment will begin to change as new CEOs come into office and begin to deploy capital instead of manipulate balance sheets to meet their earnings and bonus targets. This idea of reinvesting in your business is best exemplified in Amazon’s “Day One” philosophy, to always be reinventing yourself and disrupting your own business to continue to grow for the future. This idea has permeated across Silicon Valley and the other large-cap technology firms and is a reason why the market rally that has been sustained over the last two to three years has been led by these companies. We believe that this trend is going to continue to dissipate across corporate America in the coming decade and that our decision to invest in companies with strong fundamentals, growing free cash flow and reinvest in their future will continue to lead the market through the next market cycle.

This will not happen at once and there is a strong probability that a there will be a technical recession in 2019 or 2020 as the sugar high of a decade of historically low interest rates and the Trump Tax cuts wears off and markets re-adjust to an epoch of rewarding corporate fundamentals in a time of ever increasing automation across the financial markets.

Our team continues to look for opportunities to add to high quality investments for your accounts and that key to long term investment success is to have diversified portfolios that are able to withstand short term volatility in the markets. This allows you to remain invested in the markets for the long-term and allow your investment to work towards your financial goals.

Debbie, Chris, Mark and Rosemary