Uncertainty is running high, which, surprisingly, has often been favorable for stocks. The outlook for the months ahead is murky. While the election is behind us, questions remain about the effectiveness of the new administration and Congress, the direction of interest rates and inflation, and potential geopolitical challenges. According to the National Federation of Independent Business (NFIB) Small-Business Uncertainty Index, small-business owners report the highest levels of uncertainty ever recorded. Interestingly, elevated uncertainty has frequently coincided with strong stock performance. Although waiting for clarity before investing might seem wise, history tells a different story. When the NFIB Uncertainty Index has reached its top 5% since 1974, the stock market has delivered an average return of 22% over the following 12 months. One reason for this could be that concerns about potential obstacles may cause investors to underestimate positive factors. For instance, both oil prices and the yield on 10-year Treasury notes fell during the 6- and 12-month periods ending in August. Historically, simultaneous declines in oil prices and interest rates have been followed by robust stock market gains. Since 1980, when both metrics dropped by 15% or more—similar to the past year—the S&P 500 has averaged an 18.9% return over the subsequent 12 months, even though oil prices and interest rates typically rebound after steep declines. I currently believe the US economy is strong, and companies can handle slightly elevated interest rates. This chart below confirms that during levels of high uncertainty, forward returns are best.
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Portfolio Notes
(+) indicates a positive development, (-) indicates negative, and (~) indicates neutral
(+) Canadian Natural Resources (CNQ-T) The company said it expects production to increase 12% and capital spending to rise 13.5% in 2025, as it bets on higher demand amid tight oil supplies. Canadian oil producers have projected higher production for 2025, betting on resilient demand for Canadian crude in the United States and international markets. The company said it was aiming to drill 361 net wells across its crude oil and liquids rich natural gas assets, with a capital budget of C$6.15 billion for the year, higher than the 2024 forecast of C$5.42 billion. It aims for annual average production of between 1.510 million and 1.555 million barrels of oil equivalent per day (boepd) in 2025, resulting in production growth of approximately 170,000 boepd or 12% over 2024 levels, based on the mid-point of the forecast. Owned in Core and Cash Flow Portfolios.
(+) Costco Wholesale (COST-US) reported solid December core comp growth (total 9.9%, US 9.8%). The December comp marked a strong acceleration from prior months, driven by traffic (+5.5% globally, +5.3% in U.S.) as well as average ticket. E-commerce was the star of the month, up an impressive 36%, while COST continued to see healthy trends across its other major categories. We continue to like COST for its expanding, loyal, and higher-income membership base (steady 90% renewal rates), as well as its substantial cost-advantage achieved through scale and concentrated procurement (fewer SKUs). The business model has proven its durability through numerous macro market shifts (financial crisis, Amazon Prime, e-commerce expansion, pandemic, inflation). Shares are currently trading at a very expensive multiple but we would continue to own the stock. Owned in Core, ESG+ and US Portfolios.
Weekend Reading
RBC MacroMemo - January 7-27, 2025 Global Investment Outlook / 2025 outlook recap / U.S. political considerations / North American employment preview /Stubborn U.S. inflation in perspective /Modest economic concerns bubble to surface / Recession signals in flux / Federal reserve backs off / Canada in focus RBC GAM
Guide to the Markets J.P. Morgan Asset Management published their year-end Guide to the Markets. JPM
Trudeau was a poor steward of Canada's economy No one knows what ails Canada, but Trudeau didn't try very hard to fix it. NOAH OPINION
2035: An Allocator Looks Back Over the Last 10 Years Well, sitting here in the year 2035 and looking back at our endowment’s returns for the last decade is not a pleasant task. World markets have been subpar and our performance relative to world markets has been simply terrible. Hard times are never pleasant. But they have one upside. We can learn from them. CLIFF ASNESS
On Bubble Watch On January 2, 2000, Howard Marks published his first memo to garner any reader response, bubble.com, calling attention to excesses he detected in the market for tech and internet stocks. His newest memo revisits the subject of bubbles. Howard expresses his view that they’re more a state of mind than a quantitative calculation and describes bubble thinking as irrational, often underlaid by a widespread belief that ‘‘this time is different.’’ Rather than opining on whether we’re in a bubble, Howard lists the signs he sees today and suggests how you might think about them ... just as he did 25 years ago. HOWARD MARKS
World Gold Council Uncertainty in bond markets is likely to fuel interest in gold in January, however technical signals pose a near-term headwind for gold. WORLD GOLD COUNCIL
Growth is from Mars, value is from Venus There is no such thing as “the U.S. stock market.” Today, we have two U.S. stock markets: big growth stocks and everything else. OWEN LAMONT
‘Godfather of AI’ says it could drive humans extinct in 10 years Prof Geoffrey Hinton says the technology is developing faster than he expected and needs government regulation. THE TELEGRAPH
Paris and Berlin linked: High-speed train service launches. Currently, travelling during the day between Paris and Berlin involves a connection and usually takes between nine and 10.5 hours. The new direct train service will run daily and take around eight hours. When will Montreal and Windsor be connected? EURONEWS
Diversions
"American Primeval" A harsh landscape of freedom and cruelty in the American West. NETFLIX
"Vera" The series finale of arrives BRITBOX

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