February 2024-Monthly Update

 

Your portfolio posted gains again in January. It remains with positive performance over the past 12 months.

 

The future state of the North American economy has little to do with the present decisions in the short-term. That said, the next U.S. President is going to take credit for a strong economy. All the groundwork has been laid over the last four years as American businesses invested to address the supply chain issues that sparked the inflationary spike of 2021. This supply side response is still in the early stages of emerging as a positive trend for the United States (U.S.) / North American economy. When we look back at the end of this decade, it's likely that the restructuring, refreshing, and reinventing of the domestic U.S. manufacturing base will have had an enduring positive impact beyond what we can forecast today.

 

An additional trend that continues to unfold is the positive impact brought about by the greater investment in technology by North American businesses. This is a long-term trend that really accelerated at the beginning of the pandemic in 2020. It is producing corporate champions that are more innovative, productive, profitable, and better able to navigate future challenges.

 

Opinions in the media are missing the point around overnight interest rates and central bank decisions. There seems to be a lot of short-term fixation around the date in the calendar for the first interest rate cut. The insight is that interest rates peaked over a year ago and have been in a plateau or holding pattern ever since. Like many things in life, interest rates move in a cycle; they go up, move sideways, and then start to come down. We don't need to be distracted by the exact day when interest rates will be cut this year to understand that the path for interest rates is lower, not higher.

 

At the most basic level, lower interest rates mean more money left over for businesses and households. Generalizing the consequence for Canada and the U.S., this extra liquidity will find two different homes. In Canada, it will be used to pay down debt and help to strengthen the balance sheet. In the U.S., corporations will use this excess liquidity to reinvest in their own businesses. American households will use this money to continue to create economic activity by confidently raising their spending which further strengthens the economy and job market.

 

Let's also bear in mind that one of the drivers of stronger than expected corporate earnings has been a stronger than expected economy. Consistent and stable earnings growth raises what businesses are worth over time.

 

As successful long-term investors, all of this reinforces your investment strategy:

1. We should expect to continue to add to gains
2. The way you are invested will be fundamentally unchanged

Our preference for exposure to the U.S. economy (which began almost 15 years ago) remains the appropriate relative and absolute place to invest as part of a diversified, high-quality North American portfolio.

 

Growth is seldom linear and there will be bumps along the way. We anticipate the medium-term trajectory we’ve described above to be unfazed by any short-term distractions. You can expect us to use these periods as opportunities to buy mispriced businesses to continue to refresh and remain relevant within the portfolio as the future becomes the present.

 

You and your investments remain in a strong position.

The view from Brian Belski, BMO's Chief Investment Strategist:

“

US stocks picked it where they left off to end 2023 with the S&P 500 gaining... in January with the index setting a series of new all-time highs along the way... However, the ride was certainly not smooth as US stocks snapped their nine-week winning streak to start 2024 and remained mostly in the red during the first half of the month. Nonetheless, the weakness was quickly shaken off during the second half of January as relatively decent earnings results started to materialize and mitigate some of the investor worries that estimates going into the reporting period were a bit too lofty and were likely to disappoint. Looking ahead, we believe that stocks will continue to grind higher this year despite all the hyper focus on when and by how much the Fed will be cutting rates since economic data continues to surprise to the upside, while inflation trends are getting closer to more normalized levels… The S&P/TSX posted a modest gain in January... but is still up a solid... over the last three months. The Technology sector continued to be the key driver of performance... while Financials underperformed as rate expectations moderated. Indeed, as we have said many times, we continue to believe there will be many ebbs and flows as investors struggle with shifting expectations around monetary policy, interest rates, and the earnings outlook. However, we believe ultimately Canada will see a strong catch-up trade throughout the year as equity performance broadens out and asset flows return. Fundamentally, very little changed in the first month of the year according to our models as valuation continued to normalize and revision trends improved slightly. Of note, Consumer Discretionary saw an improvement in the breadth of revisions and a continued improvement in forward growth expectations. Industrials outperformed despite continued moderation in growth expectations. Technology continued to have the strongest positive revision and growth trends. Meanwhile, Materials significantly underperformed as growth expectations continued to be slashed and the breadth of positive [Full Year 2] revisions fell sharply below 50% positive.”

 

Stocks in your portfolio that made a new 52 week high this past month:

Accenture*, Canadian National Rail*, Home Depot*, Mastercard*, Microsoft*, S&P500 Index, Thomson Reuters*, Qualcomm*, Waste Management*

Stocks in your portfolio that made a new 52 week low this past month:

Bristol-Myers*

The Loonie declined half a cent versus the U.S. dollar to $0.745

We wish you and your family all our best.

 

Thank you,

 

Ian, Gab, Kaitlyn & Nataliia