Gravitas: Will Jackson Hole Get Us Out of the Hole?

August 18, 2023 | Michael Newton


The Newton Group Insights

August so far isn’t looking so good. The S&P 500 is down close to 4.8% for the month. Part of that is a well-deserved rest. The market had a very nice run earlier this year. Still, the economic news continues to be favourable. That recession that everyone is expecting still hasn’t made its appearance. A few weeks ago, the Atlanta Fed’s GDPNow model raised its forecast for Q3 GDP growth from 4.1% to 5.0%. Since then, they’ve raised it again to 5.8%. The reason for the latest upgrade was encouraging data on housing starts and industrial production. August is a month that is typically difficult and where market liquidity is diminished as many institutional investors are on vacation. For this to pose a larger risk, the rise in yields would need to threaten to "break something" or there would need to be an additional exogenous shock. Lately, the focus seems to be shifting to the risk that China's weak economy threatens to become a larger problem. The bankruptcy filing of Evergrande added to this. I am not in the camp this spills over into a wider selloff, and that the bottoming process should end sometime next week. Next Friday's Jackson Hole event could be the bottom. This is where Federal Reserve Chair Jerome Powell will deliver a talk on the economic outlook on Aug. 25 at 10:05am. The speech will provide a chance to give his latest views on whether more policy tightening will be needed to bring down inflation amid surprisingly strong economic growth, or if enough progress on disinflation has been made to hold rates steady.

Should you have any questions or concerns, please feel free to reach out.

Portfolio Notes

(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral

(+) Constellation Software (CSU-T) reported another good quarter with adj. EBITDA up over +26% year over year and margins came in ahead of consensus expectations. CSU deployed $458mm on acquisitions in Q2, in line with RBCCM expectations, and brings deployment to $1.608bn over the last year. This was done without issuing any equity. The quarter further supports our favourable view on CSU and we view the company as a core technology holding given its proven ability to compound capital at above-average rates over the long-term. Owned in Core Portfolio.

(-) Deere (DE-US) Shares of the farm equipment giant slid , even as the company posted beats on the top and bottom lines for the fiscal third quarter. Deere reported earnings of $10.20 per share on revenue of $15.8 billion. Nevertheless, we like Deere's move toward smart farming equipment as it can contribute to steady margin expansion over the long term. Its stronghold on the farming equipment market is also unwavering. Meanwhile, with supply chain disruptions continuing to ease, Deere remains well-positioned for consistent growth. Owned in US Portfolio.

(-) Home Depot (HD-US) beat Q2 earnings and revenue expectations but posted a 2% YoY sales decline and maintained a muted full-year sales forecast due to continued consumer caution. Owned in Core and US Portfolios.

(-) NICE LTD (NICE-US) reported mixed results, leading shares down. Cloud growth, while more resilient than peers, moderated by 200 bps for the third consecutive quarter and slightly missed consensus. Moreover, FY cloud growth expectations are now likely to come down towards the low-end of the guidance range of 22-25% without visibility into macro pressures easing. While the near-term outlook seems softer than expected, we were encouraged by momentum in enterprise, cloud migration, and digital & AI adoption, which should translate to sustainable growth in 2024+. Owned in US Portfolio.

(+) SmartCentres (SRU.UN-T) As anxiety around an economy shifting to lower gear persists, we expect SRU’s defensive, value-focused portfolio to remain operationally resilient. Indeed, traction in occupancy is encouraging, along with rising demand for new retail space. Mixed-use developments are progressing as expected, with a disciplined approach to new starts. SRU.UN reported in-line Q2/23 results on FFO. Underlying property fundamentals were also solid, supported by same property NOI of 3.2% Y/Y and occupancy of 98%. SRU.UN is also making good progress on its development pipeline, but we acknowledge that the demand for pre-construction homes has become more challenging in a higher rate environment. Overall, we would continue to hold the units for income-oriented accounts given the attractive 7.4% monthly distribution (payout of 93%) and an implied cap rate of 8%. Owned in Cash Flow Portfolio.

Weekend Reading

Some Big Hedge Funds Invested in Nvidia — Even After the Stock Surged Lone Pine, Third Point, Viking, and D1 Capital are among the funds that took their first stakes in the AI company during the second quarter. INSTITUTIONAL INVESTOR

What's the right age to start teaching your kids about finances? Here's a suggested framework, showing what to do at each stage - Have more money talks with your kids. COLLEGE FINANCIAL

A Father’s Lessons for Life and College I now have both my children off to University. Nice read that I will share with them. NIVESHAK

Sahil Bloom Offers Career Advice That Doesn't Suck The 7 pieces of career advice everyone needs to hear: (1) Swallow the frog, (2) Do the old fashioned things well, (3) Work hard first and smart later, (4) Build storytelling skills, (5) Build a rep for figuring it out, (6) Show up early and stay late, and (7) Dive through cracked doors. SAHIL BLOOM

How to make better decisions in the age of urgency Executives on average spend almost 40 percent of their time making decisions—and 60 percent say that the time spent making decisions is poorly used. In an age when speed is of the essence, how can CEOs and their teams increase their odds for successful decision making? MCKINSEY

Trader Joe's: The Anti-Grocer The retailer created a cult brand with sales of $16B+ a year by doing the opposite of industry best-practices (from wages to product to ads). TRUNG



“The only way to get ahead is to find errors in conventional wisdom.”

– Larry Ellison