The best news that I’ve received during the early months of 2021 has been reports from most of my retired clients that they have received their first jab of vaccine. Of course, we are behind the U.S. when it comes to the pace of vaccinations, but the U.S. economic recovery can only mean good things for Canadian employment and corporate profits. In short, we have much to support our optimism for the immediate future, even as we endure what we hope will be the final period of lockdowns in Ontario. Record high portfolio valuations are reflective of growing confidence in financial markets for a strong economic recovery later this year. I hope you all find some comfort in these results during what has been a difficult period for all of us.
Nevertheless, we must remain circumspect as we look forward to the future beyond the pandemic. We witnessed a bear market at the end of 2018 in the midst of excellent corporate earnings when the Fed moved to raise interest rates. 2019 was strong for stocks (even though manufacturing and earnings declined slightly) because the Fed could not (or would not) raise rates as it promised. Then, we witnessed the most aggressive economic intervention of our lifetimes, which caused a spectacular rise in U.S. stock prices from the COVID-bottom on March 23, 2020. The relationship between stock market returns and economic news has never been more unstable or unpredictable. Remember that the only strategy that could carry us through these times is to remain almost fully invested almost all of the time.
Within the context of a fully-invested, well-diversified portfolio, certain trading opportunities present themselves. Because my default posture is to be overweight defensive sectors, we were well positioned in 2020 to trade out of some of those names to buy a few pandemic “epicenter” stocks at extreme discounts. Thrill-park operator Cedar Fair (symbol = FUN) had to close their fourteen roller-coaster parks (including Canada’s Wonderland), causing their stock to fall by half. I bought shares of this 150-year-old Ohio-based company for all of you knowing that it had survived the Spanish Flu in 1918 and every recession ever since. And I know, like I know the sky is blue, that children and young families love roller-coasters. Most of FUN’s parks are scheduled to open on time this summer and the stock is near its pre-pandemic levels. More recently, the Biden election raised doubts about U.S. defense spending that led the sector to sell off when the broader U.S. stock market was rallying. I bought shares of Huntington-Ingalls (HII), the second largest builder of ships and submarines for the U.S. Navy, knowing that the new administration could not afford to neglect spending on national security. Like it or not, international conflict is an activity that will definitely resume with the rest of normal life. HII is up 27% for us in the early months of 2021.
The future may not be all roller-coasters and submarines, but certain things don’t change.
Mark Lloyd, Ph.D.
Vice President & Portfolio Manager