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Goodreid Gauge Spring 2024

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Financial markets continued their strong performance in the first quarter of 2024. The reasons are clear, inflation has come off the boil and is approaching the monetary authorities’ target levels and interest rates for the cycle appear to have peaked and are poised to fall. Finally, the U.S. economy continues to perform extremely well, with employment strong and corporate profits surprising on the upside. The story in the Canadian economy is not as reassuring as cracks in GDP growth and employment are appearing. This leads us to expect that the recent strength in the U.S. dollar will continue, supported by the likelihood of Canadian interest rates dropping sooner and farther than those in the U.S., at least in the short term.

Despite the headwinds in Canada, our equity market advanced by 6.6% during Q1. In a quarter where all but two GICS sectors finished in positive territory, the Energy sector and Industrials posted by far the highest returns. Their results were an impressive plus 12.7% and 12.3% respectively. The weakest performance came from the Communications Services sector, which finished the quarter down 8.8%. 

Concerns over inflation and continued high interest rates weighed on the Consumer Discretionary sector, impacting retail and automotive stocks. The Technology sector exhibited resilience, with some firms benefiting from increased demand for digital services and software solutions amidst ongoing digitization trends. Financial stocks faced challenges amid uncertainties surrounding global economic growth and regulatory changes.  The Materials sector encountered volatility due to fluctuations in commodity prices, affecting mining and forestry companies. Overall, the Canadian equity market exhibited a degree of volatility in Q1 2024, influenced by both domestic and international factors, with investors closely monitoring developments in geopolitical tensions, inflation, and central bank policies for future market trends that are expected to come to fruition later in the year. 

The U.S. based S&P 500 Composite Index performed very well for the second consecutive quarter, up 10.6% (in U.S. dollar terms) and 13.5% when stated in Canadian dollars. As has been the case for over a year, the equal weighted S&P 500 index trailed the capitalization weighted index by a few percentage points, highlighting the continuing influence of the mega cap technology stocks (Magnificent Seven). Drilling down, the performance sector leaders for the quarter were Energy and Materials, while the laggards were Consumer Discretionary and Staples, mirroring the Canadian market experience.

The small company Russell 2000 Index was up 5.2% in U.S. dollar terms and 7.8% in Canadian dollars.

The FTSE Canada short-term bond index advanced 0.3% in Q1, as competing forces of “higher rates for longer” and the drum beat to reduce rates in support of an ailing economy, fought it out.

Finally, the Solactive Laddered Canadian Preferred Share Index rebounded by 12% in Q1/24.

In the quarter we opportunistically added to our position in BCE Inc. (BCE), Bank of Nova Scotia (BNS), Canadian Tire (CTC.A), and Lumine (LMN). BCE experienced weakness because of industry competition among other factors. Bank of Nova Scotia is in the middle of implementing a new strategy. The market remains cautious as this strategy continues to be implemented. Canadian Tire is experiencing some weakness as a result of recessionary concerns, and Lumine was the beneficiary of a partial switch out of Constellation Software as it offered better relative value.

Weights in Richelieu Hardware (RCH), a kitchen cabinet manufacturer, Suncor (SU) a blue-chip energy exploration and production company, and Constellation Software (CSU) a large software company, were reduced. The reason for these reductions was to take some profit on issues that have done well and redeploy those proceeds into more contrarian investment ideas. 

Similar to the strategy in the Canadian portfolio, Goodreid took profits in some of its holdings in the U.S. Large Cap portfolio. In particular, shares of Eaton Corp (ETN) were sold after a very profitable (if short-lived) experience. As share prices rise, value can be challenged, even in growing companies. This occurred with ETN, as we enjoyed a 40%+ increase in the share price in only 4 months, leading to valuations that we considered unsustainable.  We initiated positions in META and IBM in the quarter. 

While we are encouraged by the reaction of the financial markets to economic and company-specific events, our experience tells us that this is an appropriate time to re-visit long term goals and objectives and ensure that, as investors, our expectations haven’t been altered by a period of out-sized growth. In other words, we want to make sure “our feet are on the ground”. When markets are strong and providing outsized performance, they illicit emotions that could take us off track. Depending on your emotional calibration, you could think that good times have taken on a permanency and that risk management is synonymous with “wasting money”. Some investors in this environment allow their asset mix to drift in favour of risk assets or concentrate investment choices using momentum as their only criteria. Others fear that the good times are due to end and take a radical approach involving market timing. In both cases, the risk is that investors lose the discipline of long-term investing. 

Chart 1, developed by our friends at Bespoke Investment Group creates great perspective. The longer you invest the more likely you are to be successful, so take periods such as the one we’re in happily but understand that it’s the long term that builds wealth and that time also creates predictability.

 


We are getting questions from investors regarding the upcoming Presidential election in the United States. Chart 2, again provided by Bespoke, studies the results of timing investments depending on political persuasion. Clearly, being politically agnostic with your investment dollars is the way to go. We have written in past commentaries about Presidential cycles and know that this year, being the 4th year of the cycle, is typically positive for equity markets. 

Fixed income opportunities have reappeared after a number of years of pathetically low rates. Goodreid has extended term modestly while continuing to ladder maturity dates of our holdings to avoid reinvestment risk. In this environment investment-grade coupons of close to 5% interest annually are available and the potential for capital appreciation is high in a falling interest rate environment. Cracks in the Canadian economy may lead to an accelerated plan of rate reduction by the Bank of Canada, so we have been actively positioning portfolios.

In conclusion, regardless of the macro-economic environment, you can count on Goodreid to stay focused on identifying and managing high quality companies, purchased at attractive prices. 


 

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