Q3 2023 market recap

Markets have taken a breather in the third quarter after strong returns in the first two quarters led by euphoria around artificial intelligence (AI), downward trending inflation, and hope for a near-term end to higher rates. Markets are always in a constant state of flux: investors engage in constant assessments and re-evaluations of risks and return potential of investments. And in this third quarter, we’ve had several items to digest.

While headlines about a potential recession have been top of mind for many, there’s a possibility of higher rates for a longer period of time as the downward trend in inflation falters due to rising oil prices and other factors. Adding to this angst is the slowdown in China’s growth trajectory. At the same time, the stocks of companies expected to benefit from AI have come under pressure after enjoying a period of strong performance.

While the markets have moved up and down on these risk re-assessments, as long-term quality growth managers, we aren’t focused on timing these market shifts as they’re difficult (if not impossible) to time. Even economists find it challenging to predict or time changes in the macro environment. Over the last several months, economists have forecasted both a hard and a soft landing, as well as many variations in between.

Rather than trying to predict shifts in macro environments, we focus our time on evaluating and reassessing our current and potential future investments in the context of the operating environment. We look at, among many other things, the robustness of business models and the strength of management teams to steer businesses through different macro/operating environments. Our focus is identifying and investing in companies at reasonable prices with a strong potential to deliver good compounding returns in the long term.

While the equity markets have turned down in the third quarter, they’ve had a strong run on a year-to-date basis with the S&P 500 up by approximately 13 per cent1. If we go back further to June 2022, which was the height of recession-induced investor anxiety, the MSCI World has had a total return of 23 per cent2 with the index recently coming close to its all-time high, which for many investors would’ve been unimaginable last year. This return to positive performance, however, shouldn’t surprise anyone. The S&P 500 has been positive approximately 73 per cent of the time over the past 100 years with strong markets often following on the heels of market corrections with the average recovery time for a correction at just four months. As usual, it’s time in the market that matters, not timing the market.

While markets are up, we recognize the challenges the current economic environment has placed on individuals and families. Inflation has placed undue stress on consumers, although it’s people at the lower end of the economic ladder who are being hit the hardest. Higher prices at the gas station and grocery stores are affecting everyone, but the impact is not the same. Families, especially those with below average household income, are feeling more of the pinch — since household expenses like gas and groceries are a higher percentage of total income, not to mention rising monthly mortgage payments and increasing rents. Because of this, retailers have been citing theft as a material impact on quarterly results, which is a sobering and concerning trend. We’ve also seen certain discount retailers like Dollarama (Canadian Equity Fund holding) post strong results as consumers trade down to stretch a dollar further.

On the flip slide, travel continues to hold strong with airlines and hotels noting increased demand. Visa® (Global Equity Fund) and Mastercard® (Canadian Equity Fund) have been benefiting from this trend as high margin cross-border fees continue growing at a strong pace. Even the global luxury brand Louis Vuitton® (Global Equity Fund) has posted solid results in recent quarters, albeit with softness in the US market, further highlighting the current divide in consumer spending.

The environment has been challenging for many managers over the last year due to the market gains being attributed to a select few stocks of companies. Investor enthusiasm for technology companies is back in full force, as big tech has led the charge in US markets on a year-to-date basis. The Nasdaq, a tech-oriented index, has easily outgained the S&P 500 by more than a two to one advantage as companies such as Microsoft®, Apple®, Amazon®, Alphabet and Nvidia lead the charge. According to Bernstein Research, up until May, only eight stocks accounted for more than 100 per cent of the S&P 500 gains and by June, only 40 plus stocks had outperformed the S&P 500, which is an incredibly low number.

For the active investor, this creates both difficulties and opportunities. The difficulties come from the fact that, if you aren’t invested in at least some of those 40 plus stocks, chances are that performance for this year has been difficult. The opportunities meanwhile are due to the high number of companies that have underperformed, which provides a wide hunting ground for tomorrow’s winners.

For us, but are still worth our attention as business models remain strong, earnings are moving in the right direction, and the potential for stock price appreciation remains strong.

As always, we’re grateful for your trust in us as stewards of your capital, and we’ll continue spending our time on activities we believe can help you achieve your long-term financial goals.

1 In Canadian dollars and up to September 20th, 2023, and with dividends reinvested.
2 In Canadian dollars and from June 30th, 2022, to September 20th, 2023, and with dividends reinvested.