A (sometimes) regular compendium of my current thoughts on markets, the economy, and other random marginalia.
Well, it's mea culpa time, I guess. I was recently questioned by three different clients as to why I was no longer sending out regular emails, especially while there was so much information to share. The truth is that I wasn't sure if people were deriving value from them anymore. The last one of these that I sent was at the start of the Russian war in Ukraine. We were finding that people weren't responding to the content as much anymore, and that the writing topics weren't coming up in reviews. It's a lot of work putting these together, and we wanted to make sure we weren't taking away from more personal and valuable client work to do this.
What has become clear is that they are valuable, as much in casual times as in uncertain ones. So look for more content from the office, both in this format, and in sporadic dispatches of interesting economics and strategy research from our colleagues at the various arms of RBC Wealth Management.
We're having a baby, 2022 edition
Sometime between now and November 23rd, the McLaughlins will be welcoming another member to the family. Avevee is voting for sooner than later. As I did with Leila, I'll be taking some time strictly away from the office as we re-accustom ourselves to the wonderful world of diapers and sleep-training. Following that, I'll be working for the next couple of months on "baby time." When Leila came in 2018 (before work-from-home was de rigueur) I spent 10 weeks working strictly from home. The reality is that newborns sleep a lot, if sporadically. So when Leila was awake, my phone was forwarding to the office, to be triaged by the rest of the team. You may also have remembered my email auto-reply from back then, suggesting that I would respond during the next nap. I'll be doing the same this time.
I am incredibly fortunate to have a team as accomplished and professional as I do, where every member is better at my job than I am. I look forward to boring all of you with tales of "that time it smiled and burped" on any call that I need to jump on while the baby is down. If history is any kind of guide, it will likely be the most productive couple of months I'll have in years, so I am also excited about working on some truly great business processes that will benefit our clients.
Lastly, I know I'll never escape alive with some of you if I don't send photos the moment the baby actually arrives, so look for those in future editions of this newsletter.
One last mea culpa: I really did think this year would end on a higher note than it is looking like it will. To be sure, we were confident that there was a massive shift in value brewing, and an inevitable part of that meant that certain industries and companies would fare poorly while others shone. We envisioned a shift from low-quality earnings to high-quality, from over-leveraged business models to more efficient ones, and from stuck-in-your-basement products and services to industrial, infrastructure, enterprise, efficiency, and leisure ones. While that shift has happened—there have been clear winners and losers roughly drawn along those lines—the concept of "winning" in 2022 has meant "not falling nearly as far as the losers." To whit:
As of yesterday—ignoring today's monumentally good day (TSX was +3%, S&P 500 was up 6%)—over the past twelve months, if you owned the S&P 500 index, you're down 17%. If you own the information technology sector alone, you're down 28%. If you own nothing but consumer staples (think General Mills), you're "only" down 1%. Granted, if you owned work-from-home darling Twilio, you were down 86% as of writing. And if you owned the "safe haven" Canada Universe Bond Index, you're down 10%. And that's before taking unprecedented inflation into account, which has lowered real returns on everything, even cash, by 7%. All to say, this hasn't been a stellar year for anyone in the financial markets. The best you could do was to avoid the worst of the damage. Not an inspiring message, to be sure. But hidden in that dour look back, some good news is to be found.
The market adage holds that "when the tide goes out, it's plain to see who is swimming naked." Companies with great stories but horrible balance sheets have been shown to have been skinny dipping in the ocean of cheap money and outsized growth expectations. But those with strong businesses generating positive earnings, many of which have seen their share prices fall in line with the indexes, stand to benefit from those earnings in the future.
And so, our disciplined investment process has us allocating capital to the companies we believe will continue to generate positive earnings regardless of short-term economic conditions. These companies have solid business models, leading market positions, and management teams committed to shareholder value. We believe they will continue to generate shareholder value through the cycle and are well positioned to do so over the long term. And, as always, we are patient investors, with a long-term time horizon, and so we are happy to allocate money to those businesses with a view to the eventual realization of their stronger positions.
Discipline, patience, and a focus on the long term. That's our recipe for success in any market environment.
The new letters at the end of my name (FEA)
I was recently honoured with a new designation that I worked hard for. In September I wrote an extensive exam and participated in an oral assessment that was the culmination of a year’s worth of study and practicum. I was finally awarded the Family Enterprise Advisor (FEA) designation.
FEAs emphasize working in a multi-disciplinary team towards maximizing all of the aspects of an enterprising family’s affairs. The FEA is not industry specific, but has a focus on the psychology of family business and the nuances of family dynamics. I am very happy to join the ranks of only a few hundred other Family Enterprise Advisors in Canada.
One of the most important things I learned during my studies is that families are not immune to the challenges that all businesses face. In fact, family businesses often face unique challenges that can make them even more vulnerable to failure. But they are also beneficiaries of unique advantages that allow them to perform better than non-family businesses in many cases.
The key to success for any family business is to find a way to maximize the advantages and minimize the disadvantages. That is where the role of the Family Enterprise Advisor comes in. We help families to identify their strengths and weaknesses and to develop strategies to overcome the challenges and capitalize on the opportunities.
I look forward to bringing my newly honed perspective to enhance my work with my clients, and clients of other professionals in my network.
RBC Articles
| Global Insight Weekly: The Fed doesn’t know where it’s going, but it believes it has to get there | The “looming” geopolitical threat has become a reality, cascading uncertainty over markets. While the situation is fluid, history shows the equity market impact could play out in short order even if the conflict lingers. We look at what the real risks to the market are, and what investors should be alert to as events unfold. |
| Market volatility and the path forward | Mark Bayko, Head of the Portfolio Advisory Group, is joined by Jim Allworth, Co-chair of the firm’s Global Portfolio Advisory Committee, to discuss recent volatility in the equity and bond markets and why investors should remain mindful of the longer-term drivers of investment returns. |