Reflecting on our summer portfolio commentary, we mentioned that we anticipated increased market fluctuations, and that’s exactly what we have experienced. Our Investment Committee took a proactive stance, strategically increasing your cash weighting by securing profits, particularly within the technology sector. This decision proved timely, as the ensuing months have indeed presented global investors with significant volatility.

The primary driver of the market weakness over the last number of months has been the shift in expectation that interest rates may stay higher for a longer period. Neither the Bank of Canada nor the Federal Reserve altered their policy rates in their latest sessions, adopting a stance of cautious observation. Indications of stubborn inflationary pressures, coupled with the North American economy's demonstrated resilience — evidenced by a surge in U.S. job vacancies and a revitalization in manufacturing — bolstered the case for sustained higher rates.

While our portfolio commentary often pivots towards equities, the current climate warrants a brief detour to discuss the bond component of your portfolio. Bond investments, as you are aware, come with a guarantee of par value return upon maturity. Yet, the journey to that end point is subject to the ebb and flow of market interest rates, with bond prices and yields moving in opposition. The recent dip in bond prices, therefore, is not indicative of long-term loss; rather, it opens the avenue to reinvest at higher yields upon maturity — a silver lining in the current market context.

The bond market's recent dynamics, especially the dramatic increase in yields since 2021, also merit attention. We’ve witnessed a climb in yields to a 17-year high for the 10-year U.S. government bond, paralleled by a significant uptick in Canadian bond yields. This shift, influenced by economic robustness and sustained inflationary concerns, among other factors, extends its reach beyond the bond market itself.

Higher bond yields impact the rate of return expectations across asset classes, given that government bonds are often benchmarks for "risk-free" investments. With the rise in yields, the landscape of investment valuation undergoes an inevitable adjustment, specifically within the “interest rate sensitive” sectors, most simply represented by companies and sectors that pay a high dividend to their shareholders.

We’ve elected to take advantage of this period of softening prices, reinvesting into high-dividend companies, both enhancing the yield within your portfolio and taking advantage of securities that we feel are trading at a discount. Concurrently, we elected to complete tax-loss harvesting early this year. To find tax efficiencies, we have traded out of certain securities and into sector ETFs for one month, allowing us to offset previously recorded capital gains in your portfolio