The following commentary and update is intended to keep you connected with the markets affecting your investments, and with the team providing you with quality investment advice. If you have questions, or if there is something specific you want information about, please let us know.

 

Market Commentary

Much of the financial literature I read these days has some reference to where we are in the current economic cycle as analysts and commentators use a wide spectrum of economic indicators to predict or forecast the financial markets. The literature indicates we are anywhere from ‘mid-cycle’ to ‘late-cycle’ to ‘pending doom’.

What isn’t debated is the pure length and magnitude of the current period of economic expansion. It’s important to note we’re coming from the depths of one of the worst periods of crisis in history, but the U.S. economy is now in its tenth year of expansion and is within two quarters of the second-longest on record. While economic cycles don’t simply die of old age, the interpretation of data and key indicators does leave the timing and result of the end hotly contested.

Many of the ‘late-cycle’ conclusions seem to be more dependent on elapsed time than on supporting economic data. We’re clearly through the ‘early-cycle’ phase, marked by low inflation, neutral short-term rates and stable bond yields. However, the past 10 years of economic growth has averaged 2.2%, far from the long-term average of 3.3%, making the use of lapsed time that much less reliable as an indicator. Using the broad characteristics of each phase of the cycle, those of ‘mid-cycle’ and ‘late-cycle’ are both evident today.

The objective in all my reading is to understand the opportunities and the risks in the market, and to use them to position investments and portfolios. This positioning could mean investing in specific sectors that benefit from continued expansion of the economy and corporate profitability, or it could mean reducing certain exposures to avoid the volatility as growth slows and becomes less predictable.

Also, the idea of ‘priced to perfection’ was noted in a previous newsletter, and we continue to see it play out into the fall this year. Companies will earn growing expectations from analysts and the market until all efforts and efficiencies are squeezed, and a company misses a target or suggests publicly that the expectations won’t be met. Dollarama is the latest example of this. They recently met analyst expectations, but suggested that maintaining their market-leading growth figures is in jeopardy. It has resulted in a dramatic decline in its price, and what I believe to be an excellent opportunity to buy a high-quality company with a proven management team at an attractive price. Dollarama remains a core Canadian equity position for new and existing accounts.

 

Estate Planning

I was surprised to read that the late Aretha Franklin did not have a Will when she passed away last month. This means the distribution of her multi-million dollar estate will be decided by the courts. Apparently her four sons and a niece have all filed documents identifying them as interested parties to the estate. That may not be the complete list.

Wills and estate plans are not solely for the wealthy or famous. An estate refers to what you own – money, real estate, possessions, business assets, etc. A Will outlines how you want your estate to be divided, and can be as simple or as complex as you wish it to be. For business owners, a personal Will and a business Will are required to properly settle their estate.

We encourage everyone to have an up-to-date Will. It’s partly for their own sake and for the sake of loved ones during an already difficult time. We have some great resources and partners to help get started.

 

Energy Sector Opportunities

The energy sector has not been an easy, or rewarding, place to invest money over the past 3-4 years. It’s been a series of new worries, including the adoption of electric vehicles destroying demand, improved efficiencies in U.S. shale production, transport bottlenecks, changing OPEC policy and trade disputes. February 2016 marked the low point in the price of oil at US$26.05. Since then, the price has increased 165% to almost US$80. The share prices of Canadian oil companies have not experienced this same type of appreciation, and as a result, trade very cheaply relative to the price of oil.

There are a couple of reasons for renewed optimism in this sector. Demand continues to grow with corresponding supply being constrained by pipeline capacity, OPEC exhausting most of its spare capacity, and a significant decline in drilling activity and new resource discoveries. At the same time, companies have used these difficult markets as a time to stabilize themselves by cutting costs, increasing efficiencies, and improving their balance sheets through stock buyback programs.

We own high-quality energy companies and investments with excellent assets and proven management, and think we’ll be rewarded in time as this gap between stock price and oil price is closed.

 

After Hours

Growing up, we were encouraged to focus on the positives, to look through the challenges and troubles that life brings and make the best of any situation. This past summer, optimism was put to the test.

Due to some deterioration in the kitchen plumbing at the cottage, our arrival on the long weekend in May was met with extensive water damage and mold growth throughout the building. While our career and kid activity calendars don’t afford us the time at the cottage we may like, summer is when we try to get the most use of it. That didn’t happen this year aside from a few trips up to meet with remediation contractors and building hygienists.

Looking back now on what turned out to be some last minute vacation planning, our summer was awesome. We spent some quality time in Prince Edward County, Collingwood and Wasaga Beach visiting grandparents, aunts, uncles and cousins, and have some great memories from it. We had a one-week cottage rental and spent it exploring a different lake and community. We had a successful Little League Provincial Baseball Championship in Windsor, followed immediately by the ‘Baseball for All’ National Girls Baseball tournament in Rockford, Illinois. And we were able to experience more of city life, at a different pace than usual.

As the new school year started and the kids reflected on their summer break, it was great to hear that same optimistic attitude was ringing through – while they all missed having the cottage, it turned out to be a really fun couple of months with some great memories.

 

Regards

Thank you for the trust and confidence you place in us to provide you with investment advice and wealth planning services. If there’s anything we can assist with, or anything you’d like to discuss, please feel free to contact me.