November 2022 - Monthly Update
Kaitlyn Richardson - Nov 01, 2022
Trust this note finds you as we continue to enjoy a sunny and extended fall season.
Your investment portfolio posted gains in October. It shows a small retraction / neutral performance over the past 12 months.
We are in the middle of a powerful refresh of the manufacturing sector here in North America. This trend began in 2016 and has gained significant momentum during the pandemic so that businesses are able to produce goods from start to finish on the continent. The result is a North American economy that is more independent and resilient with access to supply that is more stable and consistent.
This industrial renaissance in combination with demand consistency in the US domestic economy we expect to form the basis of a new cycle of economic growth to begin sometime in 2023.
As we have written in the past – the word recession (and its prediction) has now moved into the headlines. A recession is a description of an economy in general. By adding up all the moving parts, is the economy growing, static or shrinking in aggregate. For us as investors, this simplification distracts from the reality that in an economy as big and diverse as the U.S., there are always areas of growth as well as contraction during a recession. The other is that leading up to and in times of transition, investment markets lead and the performance of the economy follows.
Looking back, the selling pressure of 2022 may have been a reflection of the current economic slowdown. We may be in the early stages of a recovery for investment markets that is foreshadowing the new cycle of economic growth to begin at some point in 2023. This reminds us of 2011 when a new cycle of economic growth was lead by the U.S. domestic economy two years after the credit crises and driven by private sector activity and investments made by businesses between 2009 and 2011. Back then, it was the technology sector. This time it looks like manufacturing/logistics in combination with investment in technology. Innovation around how we make things and move things around in a more productive way than ever before.
The Canadian economy will slow down faster and to a greater magnitude than the US. We will however manage much better than Europe and other developed economies. We expect the peak for Canadian overnight interest rates to be lower than the U.S. and for the Bank of Canada to cut overnight interest rates ahead of the U.S. Federal Reserve.
Central banks are not accelerating the pace of their overnight interest rate increases. We now have the second central bank (Canada) to raise rates less than expected in October.
We remain careful and cautious in the short-term while constructive and confident in the medium-term as we methodically shift into being opportunistic buyers.
Our investment strategy of the past decade remains unchanged: A diversified collection of high quality, profitable businesses focused on the domestic U.S. economy with exceptional leadership. These businesses we own continue to grow, innovate and thrive while navigating periods of uncertainty to emerge bigger and better.
Your investment portfolio remains in a strong position.
The view from Brian Belski, BMO’s Chief Investment Strategist:
“The S&P 500 rebounded … in October, marking the second best monthly gain [year-to-date] and strongest October since 2015 as depressed sentiment, pockets of earnings strength, and
the possibility of smaller rate hikes by the Fed starting in December helped lift US stocks. After the index fell to a new bear market low in mid-October, we reduced our 2022 yearend
S&P 500 targets … in order to account for the higher inflation environment, which we underestimated with our previous forecast. While this revision represents a departure from our longstanding bullishness, we remain more optimistic than many of our counterparts who are calling for a further collapse in price and earnings by the end of the year. For our part, although we have tempered our enthusiasm, we do believe the bear market trough is already in place and that US stocks can continue to move higher from current levels. The one caveat is that the future trajectory of stocks is likely to follow more normalized price patterns, a sharp departure from the pandemic stimulus-fueled gains of 2020-21 and the resulting [year-to-date] losses that unwound much of that excess… The S&P/TSX increased … on a price return basis in October, well behind the … gain posted by the S&P 500. While Energy was the largest driver of performance in the month, there was a clear shift to the more cyclical areas with Technology, Consumer Discretionary and Industrials all outperforming the broad market, which clearly favours the US. Meanwhile, Utilities and Materials were the only sectors to decline on average during the month. While we certainly remain bullish heading into year-end, we do believe the issues facing the market are unlikely to dissipate in the near term, and as such we expect this higher volatility backdrop to persist over the coming months. However, we believe this does NOT mean investors should position portfolios more defensively, but rather focus on areas of stability, value and income—three core characteristics of Canadian equities within global markets, according to our work. Overall, we believe Canadian investors should remain broadly more cyclical while focusing on areas with strong relative value and income growth potential.”
Stocks in your portfolio that made a new 52 week high this past month:
United Health*
Stocks in your portfolio that made a new 52 week low this past month:
Accenture*, Fortis*, Mastercard*, Microsoft*, Qualcomm, Royal Bank*, S&P500 Index, Thermo Fisher Scientific, Telus*, United Parcel Service*
The Loonie gained over one cent versus the U.S. dollar to:
$0.73
Thank you and all our best,
Ian, Gab, Kaitlyn & Nataliia