Q4 PIMG Commentary: A Strong Finish

Investors have much to celebrate after asset prices rose across the board in the final quarter of 2023. Market sentiment swung from concern to euphoria as the potential for a soft economic landing and lower rates ahead began to gain traction. The triedand-true maxim of buying into fear is once again looking wise as we turn the page on a volatile but rewarding year.

The fourth quarter began in the midst of a fairly painful market correction. Most equity markets had fallen more than 10 per cent from their summer levels and concerns over the state of the economy were plentiful. The recession call that was very much a consensus at the start of the year looked like it was starting to play out. Higher interest rates were acting to slow the global economy and a troubling spike in geopolitics provided additional uncertainty. However, as often happens, just as everyone was sure that the worse was yet to come, markets started to bottom. Whether it was better news on the inflation front, or corporate earnings and employment numbers that have remained resilient, the market made a turn for the better and closed the year with respectable gains.

Perhaps 2023 will be remembered most as another year confirming the old joke about economists predicting nine of the last four recessions. It seems that every strategist was expecting a slowing economy to drag down markets and follow through on the challenging performance of 2022. As firm believers that the market is always discounting the future economy, and not the current one, we continued to ask ourselves whether the market performance of 2022 had already “priced in” the economic slowdown? Maybe a soft landing could be executed, and the strength of the economy was being underappreciated?

While we won’t know if this economic slowdown is over until long after it actually is, we remain optimistic that the economy will grow over the years ahead. We are also confident that high quality businesses, like the ones we own in client portfolios, will navigate the ups and downs of the economy and will be managing their business with the intention of growing and rewarding shareholders. Strategists and economists that make predictions for the economy make for good headlines and annual forecasting reports, but these predictions provide little value for long-term investors.

Over the quarter, we continued to buy into securities that were trading at a discount in large part because of higher interest rates. Bonds like the one we added from Loblaw, that was trading at 85 cents on the dollar with seven years to maturity, looked compelling given its duration and high credit quality. This bond will earn investors an annual return of a little over five per cent per year, if held to maturity in 2030. We also added to our equity positions of BCE and Telus, which were sporting tax efficient Canadian dividend yields of over six per cent. These yields will likely increase each year and only add to the growing stream of cash flow that clients can expect.

In the U.S., the market correction gave us the opportunity to add to holdings in McDonald’s and Coca-Cola. These companies have businesses that are extremely recession-resistant. In fact, we often see McDonald’s’ sales increase during challenging economic environments as consumers trade down for cheaper food options.

Looking forward, we continue to expect inflation to moderate and interest rates to follow suit. Should this play out through the first half of 2024, the market should react favourably. If inflation does return and rates trend higher from here, we may face a more difficult economic environment ahead. Canada has more near-term issues than the U.S., given our debt load and reliance on commodity markets. However, the recent difference in market performance and resulting valuation (Canadian markets are trading at a significant discount to U.S. markets) likely already accounts for this. In other words, consistent with our efforts to buy assets at a discount where possible, Canadian markets could provide some additional upside in the years ahead, if debt can be paid down and the economy can start performing better. The latter half of this equation may take a renewed focus on growth and free enterprise, which seems to be absent amidst our government’s current objectives.

Most investors would be best off paying little attention to economic or market forecasts for the year ahead. Focusing on your own financial plan, which may include paying down debt, saving for retirement and ensuring your tax and estate plans are in order, will be of much more value than allocating assets based on near-term guesses. A sound personalized investment plan and associated investment strategy accounts for the unpredictable nature of the markets. Remember that despite experience or credentials, the market, like the future, will forever remain unpredictable.

Your Plena Wealth Advisory Team

This newsletter has been prepared by Plena Wealth Advisors. Statistics and factual data and other information in this newsletter are from sources Raymond James (RJL) believes to be reliable but their accuracy cannot be guaranteed. This newsletter is furnished on the basis and understanding that RJL is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. RJL and its officers, directors, employees and their families may from time to time invest in the securities discussed in this newsletter. This newsletter is intended for distribution only in those jurisdictions where RJL is registered as a dealer in securities. Any distribution or dissemination of this report in any other jurisdiction is strictly prohibited. RJL is a member of the Canadian Investor Protection Fund.

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