Monthly Partner Memo – November 2021

November 01, 2021 | Paul Chapman


Take comfort in the knowledge that your capital is being managed the way your friends complain they wish their capital was managed.

view of earth from space

The world lost a great leader in Colin Powell last month, and I thought I would share his “13 rules to live by”. Some leadership quotes are more actionable and impactful than others, and I find these to be poignant:

1. It ain't as bad as you think. It will look better in the morning.
2. Get mad, then get over it.
3. Avoid having your ego so close to your position that when your position falls, your ego goes with it.
4. It can be done.
5. Be careful what you choose. You may get it.
6. Don't let adverse facts stand in the way of a good decision.
7. You can't make someone else's choices. You shouldn't let someone else make yours.
8. Check small things.
9. Share credit.
10. Remain calm. Be kind.
11. Have a vision. Be demanding.
12. Don't take counsel of your fears or naysayers.
13. Perpetual optimism is a force multiplier.

Friends & Partners,

I’ve been so pleased and overwhelmed by the positive feedback on my monthly memo, I’m glad that it seems to be helping so many filter out the endless market noise and (hopefully!) give you an objective, balanced and straightforward view of market dynamics and drivers. I certainly welcome and appreciate all of your support, feedback and comments.

Having been generally constructive on the direction of the markets this year has been challenging because it has felt ‘dumb’ when all of the ‘smart money’ talking heads and financial pundits in the media have been awaiting the market’s imminent crash. So I’ve always paused before hitting the send button as I want to present a balanced view of the various forces driving these markets, and it’s never easy. No one will ever get it right all the time – this is why timing the market is a mug’s game. But, in simple terms, when too much money is chasing too few things, prices go up, and there’s still too much money chasing too few things.

Just as inflation fears exploded, corporate earnings were expected to finally pause given the supply chain issues globally – but once again they have beat expectations in a big way. Fears that margin compression, inflation and supply chain issues would potentially reduce expected 2022 S&P 500 earnings has not come to fruition. The bond market has been under threat by central banks about to raise rates, but yields remain generally under control. Oil and commodities are going nuts. The market continues to climb ‘the wall of worry’ as it often does.

As always, there are risks and challenges to be cognizant of. Potentially higher corporate taxes, further COVID waves, an ailing Chinese economy, the prospect of declining central bank accommodation, supply chain bottlenecks and rising inflation all warrant close attention. But the main risk at this time is high valuation levels – no asset class is cheap in this current environment, which certainly makes it difficult to feel comfortable. But there remain pockets of value, and this reinforces why best-in-class active management (i.e. stock picking) will continue to outperform. At current levels, the S&P 500 has a forward price-to-earnings ratio of 21. This means that investors are willing to pay $21 for every $1 of earnings S&P 500 companies are expected to generate over the next 12 months. Historically, this ratio has sat closer to 16. But, the economy should continue to grow for the next 12 months and drive revenue and earnings higher. Recessions are ultimately bull market killers, but there are few signs of a recession on the horizon.*

So, my song remains the same – the outlook is generally constructive, but the path is going to remain rocky. Expect more muted returns, and a more volatile path ahead. There aren’t many things one can guarantee when it comes to forecasting, but this is one that I can: it’s going to take a more active and alternative approach to your current portfolio to outperform moving forward that it has in the past – choose your investments and Advisor wisely.

Looking for a Major Correction? Maybe We’ve Already Had It…

We got a small correction in September, as brief and shallow as it was. But beneath the surface, the story is different. Although the S&P 500 index has only pulled back a max of ~5% in 2021, the average S&P 500 stock has experienced a maximum price drawdown of almost 18%, and 90% of stocks in the S&P 500 have suffered a 10%+ correction this year!


Source: Morgan Stanley 

Bonds Are Brutal

I hosted one of Canada's thought leaders in the fixed income world for a very short video interview this month, you can watch it HERE – Brian D'Costa is the Founding Partner and President at Algonquin Capital. He is member of the Bank of Canada Fixed Income Forum, and former Global Head of Fixed Income and Rates for CIBC World Markets. This is certainly the guy to talk interest rates, inflation, and portfolio implications with.

Bonds were generally negative in their performance last quarter, and many bond funds are down this year (something I started calling for last fall). Even the traditionally bulletproof US Treasuries are down over 2% this year, and are on track for their first annual loss in almost a decade.

Rates are going higher, that much is clear. And inflation isn’t kind to bonds, which is not going away tomorrow. So bonds are challenged, it’s as simple as that. That also doesn’t mean you zero out your fixed income holdings – you need to partner with the very best in class fixed income managers to navigate this environment and preserve your capital.

As well, bond correlations have traditionally been negative (meaning they move in the opposite direction of equities, smoothing out the ‘noise’ when markets get rocky). They’ve recently become positively correlated, something I’ve also been predicting for months as a major risk – this isn’t a good thing. There are ways to combat this issue as well, and traditional bond allocations and holdings aren’t the answer.

Source: Bloomberg*

What is the Status and Outlook For Inflation Now? What About the Dreaded Stagflation?…

Inflation is proving stickier than many who thought it was a short-term phenomenon, and this is certainly a major risk. We all feel the impact of commodity prices running wild, and are all hearing about the major supply-chain issues effecting virtually every industry. It’s not likely to get better any time soon as extreme weather, soaring freight and fertilizer costs, shipping bottlenecks and labor shortages compound the problem. Adjusted for inflation and annualized, costs are already higher now than for almost any time in the past 60 years, according to United Nations Food and Agriculture Organization data.

As we and others have repeatedly said, inflation expectations are more important from a market standpoint than inflation statistics, as rising inflation expectations result in changes to behavior, which make inflation permanent (think about running to the store to stock up on stuff that you fear they may run out of). If inflation expectations rise too much, it will make the central banks more ‘hawkish’ (meaning they raise rates more quickly than expected), something that the market is not assuming right now and an event that would cause major volatility.

But, stagflation isn’t in the cards just yet (I gave an overview of the basics of stagflation in last month’s memo):

Finally, will rising commodity prices choke off economic growth? Likely not – the ‘energy intensity’ today isn’t like it was in the stagflation era of the 1970’s:


Bottom line: the road will remain rocky, and the traditional portfolio is NOT well suited for the environment we are in (equities AND bonds were down in Q3) and will remain moving forward. Are you positioned for increased volatility and do you own inflation-linked assets? 


There Still Remain Reasons to Be Optimistic You Know. Here are 10 of Them.

I’ve noted many of the risks for the market outlook, and here are some of the near-term tailwinds to consider:

  1. We are entering a seasonally strong market in Nov/Dec. As BofA notes, "75 of past 95 years = Q4 rally in S&P". We have only had 7 negative Q4's since the 1987 crash, and all were associated with some sort of a "wobble" in credit.

  1. Earnings are still going strong.
  2. Don’t fight the Fed (tapering still allows Fed to inject another $400+ billion into the system).
  3. Corporate buybacks (could be more than $1 trilliion in stock bought back over the next 12 months).
  4. The consumer remain very healthy, which is over 70% of US GDP.
  5. Corporations remain very healthy (markets love buybacks but will take dividends, too).
  6. Comfort that China’s property problems are not globally systemic.
  7. Covid is ramping in the UK, which has been a leading indicator for US cases, but is becoming more manageable and less impactful on the economy.
  8. It is possible that DC delivers another multi-trillion $ tailwind via infrastructure where the discussed tax consequences may do little to derail equities.
  9. Stocks actually can and do perform well during periods of rising rates! See below:

Sure, valuations are high, but if you are taking signals from and waiting to buy when the Shiller P/E ratio drops below its average (a common value investor metric), you may be waiting a while. It’s zero for eleven in calling market tops, and in the last 40 years, you would have had a buying window of ~7 months(!) if you were a value investor who only bought stocks when the Shiller P/E was below its average…


Some Interesting Events to Highlight

Over this past couple of months, I hosted and participated in a number of interesting events that all proved to be very interesting. 3 events I hosted in partnership with Women, Worth & Wellness, and were in-person with fantastic guests. I ensured I had professional video shorts of the events which you can view here: one was a YOLO Event at Gibson’s in Collingwood; one was a golf fundraiser for the Collingwood General & Marine Hospital with Sandra Post; with the other being an outdoor event we called “Paris in Our Own Back Yard” at Georgian Hills Winery with Diana Bishop.

I was also honoured to be part of a recent family office/high net worth summit in Toronto with The Tech Society, where I was able to host panels discussing portfolio construction, integrating alternative assets, and family office co-investing. It is clear that as the world changes, family offices and high net worth investors are changing their approach and adapting along with it. “Institutionalizing” a portfolio is very possible and accessible to everyone now, but very few know how to implement such strategies.

Stay tuned for details regarding an upcoming event in November focusing on empowerment through philanthropy in partnership with the Georgian Triangle Humane Society, we have some fantastic speakers lined up for that one.


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