Happy November! I hope everyone had a great Thanksgiving and Halloween! I wrote in my last commentary how I was going to try and fight to keep some of that unstructured time that I found during the pandemic as things reopened. That is not going well for me so far! We had 11 soccer games in our family over Thanksgiving weekend, along with a couple of 50th birthday parties and two Thanksgiving dinners. I am missing socially distanced protocols! I wish we could cherry-pick what goes back to normal and what we keep from COVID protocols. I want things to reopen, just not completely!
I’ve got season’s tickets to the Whitecaps, but with COVID this year, they have only been at half capacity in the stadium, and they have been giving season ticket holders the option of what games and seats they want. I rented out a suite for the family – usually, it is a 14 person box, but at half capacity, we got the whole suite for 8 of us. There was lots of space to move around, food catered, good game to watch, and no crowds – it was brilliant! Is it too much to ask for things to stay that way?! October just got away from me as work, personal life, and coaching got hectic – life is harder when you have to leave the house! I missed sending out the market commentary in September because of it (not because markets were down!). I figured it was easier to skip a month and start fresh again than to try and catch up. If it’s good advice for investing and fitness, I thought I could apply it to work too!
Markets came off their record highs by about 6% in September. Part of my busyness in October was answering client questions on portfolio statements that showed a decline for the first time since March. We have adjusted pretty quickly to portfolios just moving upwards over the last year, but it is important to remember corrections are a normal part of market behaviour. We had at least one drawdown of 10% or more (except for 2017) in each of the last ten calendar years. September brought us concerns surrounding Chinese regulatory changes, energy costs, the US debt ceiling, and inflationary fears.
Facebook is dealing with its congressional whistleblowing testimony fallout surrounding the safety of its social media platforms with the most extensive rebranding in history. It will now be known as “Meta” and is working tirelessly to create a virtual world or “Metaverse” utopia we can all retreat to live in blissful ignorance of the reality of the real world. Or something like that. I’m not exactly sure how it will work; I just know it is a pretty novel and powerful way to try and reimage the company! The hardest-hit companies continue to be the “growthier” or “riskier” ones. Not because their earnings are down, but because their growth is no longer accelerating.
Given the volume of negative headlines, it is surprising that we haven’t hit a 10% correction already yet this year. Short-term, I believe there are opportunities in these sectors. Investors bailed on what I would consider good companies in areas with long-term potential, favoring more traditional companies with established earnings and balance sheets.
October brought us the COVID pill from Merck, improving case counts in most countries and robust earnings reports. Markets were up across the board, recovering from the September dip, and most major indices are again flirting with record highs. There are still many negative headlines, but strong earnings have been tempering the news a bit. Last week, policymakers at the Bank of Canada meeting landed squarely on the hawkish side of forward-looking expectations, setting the table for interest rate hikes to happen sooner than was generally forecast just a quarter or two ago. With employment back to pre-pandemic levels, housing still booming, and record highs in markets, it wasn’t that hard to see that change in policy coming!
There is a lot of concern swirling around inflation. It is not around whether it is here – it is, but whether it will be transitory, cyclical, or persistent. I think a lot of the inflationary problems still center around supply chain issues.
You just can’t get stuff right now.
We did a small bedroom renovation over COVID, and I somehow missed the meeting with my wife, where it was decided that the renovation included all new bedroom furniture. So, when our contractors finished the work last month, we moved back into the room, but we now have a five-month wait for the new bed and nightstands. Every person I know has got similar stories about waitlists for something right now.
Factories closed during COVID; then you couldn’t find enough shipping containers, then there weren’t enough boats, now there aren’t enough workers to unload and distribute the boats. Turning the economy back on is not as simple as turning it off was.
There is a significant shortage of workers right now, and the fear is that higher wages are needed to lure the voluntarily unemployed back into jobs. They call this last quarter the “great resignation” as many people took early retirement or decided they didn’t like their jobs enough to return to them when the economy reopened. Government support programs, rising net worth because of jumps in housing prices and stock portfolios, and fewer places to spend your money have taken the urgency away from people needing to settle for jobs they don’t love. That is all well and good for now. Still, my personal feeling is that as benefits dissipate, housing and stock markets cool off, travel reopens, and concerts, sporting events, casinos, and other entertainment comes back online entirely, people will want to participate. They will get a lot less picky about their jobs and be more concerned to just get a paycheck again when they start missing out on weekend getaways to Vegas! I am, however, less entrenched in that position than I was earlier in the year and am very closely monitoring those inflation numbers! Just in case watching “Squid Game” was not enough to scare you into being careful of your debt levels, remember that paying down debt is a sure-fire way to hedge against long-term inflationary concerns!
Sorting out what is critical information from noise is one of the hardest things to do in life. I can coach a soccer game and quickly identify 50 different things that need improvement. Being a good coach means sifting through all that information and disseminating what needs immediate action. Is it a tactical, technical, physical, or mental problem that we must address most crucially? Is it team focused (macro) or individual (micro) problem?
The key to successful coaching is identifying the critical success factors that will give you the best chance of winning the game. And when you are relaying this information to 17-year-old boys, you have to disseminate those essential factors down to just a couple of key takeaways; otherwise, they won’t be able to act on any of them. If I have three key points in any pregame or halftime talk to my team, it is probably one too many! Sorting through all the critical economic data is similar to coaching only on an eminently more complex level. There is just so much more information, more moving parts in play, and more subjectivity involved.
That’s why building a balanced portfolio is the key to long-term success. Too many moving parts to make “noise’ trades. We have inflationary assets in the portfolios we built already. Not because of short-term inflationary concerns, but because they are a good diversifier for any account and part of our overall portfolio discipline structure. The more discipline and structure we build into our portfolio, the more we can automate our decision process, the less likely we will be pulled off the pathway to meeting our long-term goals.
I believe we are only partway through an expansionary phase in the economy. We took a hit during COVID for sure, but the speed of recovery has been astounding. Rather than families having to rebuild lost wealth, the combination of government benefits, record highs in stock markets, strength in real estate, and lack of options/restrictions around spending money mean that consumers are actually in pretty good shape. More than good shape in that, on aggregate, the average net worth of households in North America is at record highs. That wealth effect is going to continue to trickle into the economy for years. I have two years of missed holidays to make up for as soon as travel opens up again, and I am not alone in that thinking! Even if I am wrong in the short term, the discipline of looking through headlines and choosing to partner with quality, durable companies allow us a much greater chance of getting those critical success factors right over the long term.
Stay safe, stay positive and stay disciplined!
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