MIDTERMS
Midterm elections in the United States are still to be sorted out, but we can say it is a very close race for control of the Senate, and thus that we are on track for the divided government widely expected. This could result in a degree of legislative gridlock, which the market tends not to react positively to, but here is the thing: none of this matters to our clients’ portfolios, or to our ongoing strategy. It is just noise. Noise that will not distract us.
Here is what has always mattered to us as long-term investors: that we buy the right companies that have strong underlying earnings and are available at the right prices, which will ultimately translate to above average returns, driven by and in alignment with your financial plan.
So, while we are closely monitoring the US midterms, no change in our strategy, which we outline below and which continues to outperform the market, is required.
OUTPERFORMING
Even after an increase of almost 7% in the month of October, the S&P 500, which we regard as the authoritative indicator of how the markets are doing, is still down over 20% this year. Our portfolios, on average, are down 6% on the year.
Our long-time strategy, explained here and here, thus continues to outperform the market.
Of that strategy, a key component which continues to be effective in this inflationary environment is to own companies that can pass on their rising costs to consumers. For example, we bought Restaurant Brands International early in 2022. The owner of Tim Hortons, Popeyes and Burger King, it is up 12% since our purchase, and that is without the dividend of almost 4%.
Likewise, CN Rail and Air Canada are doing well. Air Canada, for example, recently reported nearly matching the number of seats it sold for the same period in 2019. Air Canada expects demand increases to persist, as do we.
There are some other companies that we want to own, but not at their current prices – although those prices are getting close to what we seek. So you may see minor changes in your portfolio in the short term.
And, as mentioned in the September issue of Marche Monthly, for the first time in 15 years we are continuing to buy longer-term bonds and GICs. They are a silver lining of higher interest rates, because they are generating real returns we can’t ignore – in the area of 5%. Have a look at the September issue for an elaboration of this strategy.
INTEREST RATES
Speaking of interest rates, in the final week of October the Bank of Canada unveiled its latest interest rate decision, raising its overnight rate for the sixth time this year, to 3.75%. The 0.5% increase, which is still sizeable by historical standards, was less than the 0.75% that was expected by many investors. It was also less than the preceding two interest rate hikes of 0.75% and 1% delivered in September and July, respectively.
To use a baseball analogy, we believe we are in the 8th inning of rate increases – and we believe that one year from now, we will be discussing interest rate cuts, which will be favourable for your investments.
SOME PEOPLE ARE NOT DOING WELL
I can assure you that we all know people, whether or not we know the exact circumstances of their portfolios, who are doing poorly with their investments. Many of the people being referred to us, for example (who are precisely the people we want to help).
Here at Marche Wealth Management, we are focused on achieving higher returns with lower risk. But I am meeting many potential clients who are getting lower returns with higher risk – and higher fees! And many of them do not fully understand the position they are in.
Over the past five years or so, many of these people haven’t just not made money – which they should have in a properly created and managed portfolio – they have actually, to my surprise, lost money. In a section that follows below about foundations, corporations and “MUSH” organizations, you will see that many institutions I meet are suffering in similar circumstances.
If there is a person you are thinking of referring to us, now is the perfect time of year, because we can include a conversation about year-end strategies to lower one’s tax bill, including income splitting, life insurance and tax loss selling.
EARNINGS
Many very large companies, including tech giants Alphabet, Apple, Amazon, Meta and Microsoft, reported third-quarter earnings in late October (that is why, along with the Bank of Canada interest rate increase at that same time, we delayed this issue of Marche Monthly to early November).
Those companies’ results were mixed, although results from the US banks and payment networks suggests the US economy remains resilient right now – especially the consumer, by which we mean that consumers are absorbing price increases and continuing to spend.
Overall, we continue to believe the North American economy is more resilient than some may appreciate and that the economic and earnings challenges may only come home to roost next year, once this year’s rates hikes have been fully digested.
The bottom line for us is this: our strategy continues to work and we continue to stick with it.
FOR THE YOUNGER GENERATION
Noah Booth is a remarkable young man – a teenager who has written a remarkable book for teenagers and kids about financial literacy. It’s called A Rich Future: Essential Financial Concepts for Youth.
We were delighted to present a 30-minute conversation with Noah on October 26, and now you can watch the recording online. It’s the perfect event for you to attend with your younger children, grandchildren, nieces and nephews. Just click the link below to hear about Noah’s passion for personal finance, his motivations to write a financial literacy book that would help other kids and teenagers, and key concepts every young person should know about to help in building a successful financial future.
We’re honoured to work with multiple generations within our client families. We also believe very deeply that wealth management doesn’t need to be complicated. Instead, it needs to be simple. This is a very special event on both of these scores.
Click here to watch the recording. And, for other financial literacy resources, click here and here.
“MUSH MONEY”
Are you a stakeholder in an organization with institutional investments, or know someone who is? How are those investments doing?
I know from experience that many are underperforming.
By MUSH Money, I am referring to the investment positions of municipalities, universities, school boards and hospitals, many of which we have as clients. To that list, I would add corporations and charitable foundations, because we work with all of them.
Recently for these kinds of clients, we have been reviewing their investment policy statements – to ensure they are still aligned with their objectives, have relevant performance benchmarks, and that the investment management fees are competitive. Investment policy statements should provide the flexibility to capitalize on current market conditions in order to enhance returns with lower risk going forward. For example, just last year, a 5-year GIC paid 2%, and today we can buy many GICs paying more than 5%.
Want to learn more? We are always ready for your call.
OPPORTUNITIES AT YEAR END
In the last few years, because our portfolios have been doing so well, many clients have incurred capital gains, upon which they have had to pay capital gains tax.
Now, because some companies we own have declined in value this year, we are working on identifying a small number of opportunities to sell those investments at a loss – which would have the effect of offsetting some of the capital gains tax you have paid in the past three years. You may recognize this as a strategy called tax-loss selling.
If we see any opportunities for tax-loss selling in your portfolio, rest assured we will take advantage of them. And if you are interested in learning more, just give us a call as always.
LEST WE FORGET
In the 20th century, more than 100 million people were killed in wars. Friday we marked Remembrance Day to honour the selfless men and women who have protected our lives and our freedom – and we hope, despite all odds, for an end to all wars. We especially honour our very own Joy Loewen, who served for over three years in the Royal Canadian Navy as a Marine Engineer in the first Gulf War.
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We don’t speak jargon. We’re all about uncomplicating your life, so we speak plain English. If there is someone you care about – someone who would appreciate this simple and straightforward approach – please feel free to share this message with them or put us in touch.
Want to discuss any aspect of this month’s blog, or any other issue on your mind? Have a story idea? I am always happy to receive your call or email.
Tyler Marche, MBA, CFP, FCSI
Your life, uncomplicated
tyler.marche@rbc.com
1-416-974-4810
www.tylermarche.com