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  • Writer's pictureRoger Banks, RRC

How to Press Forward...

Market Update: Q1 and Q2 - 2023

If we take a look at general markets, the Dow is up 5.83% and TSX is 5.40% since Jan 1st. Historically we have outperformed the general markets and done so with less risk, due to our high-caliber bond portfolio. The interest rate increase we witnessed through 2022 and now into 2023 is a very rare occurrence that had a negative effect on the bond markets across the board. However, our bond portfolios are managed by a highly regarded and very successful team of bond experts.


With rates near a peak, we are now seeing opportunity presenting itself in the bond sector. Bonds have not been this attractive since 2008-09. Our managers are strategic and the results during these past 2 quarters are indicative of that opportunistic and tactical approach as we see the separation of our portfolio from general markets. For example, the Bond Yields pulled back in May causing bonds to finish the month down by 1.5% but our managers actively take advantage of these opportunities and capitalize on price discrepancies.


The reason bonds make a great investment now.

1. Current yields (the interest paid from the issuer) are at levels we have not seen in decades: Bonds are becoming a meaningful income generator.


2. Lower inflation will act as a tailwind: Bond holders will get relief as price pressures ease.


3. A recession will bode well for bonds: Bonds provide a stream of income, even in recessionary times.


4. Central banks are nearing the end of their interest rate-hiking cycles: As yields (interest rates on new issue bonds) begin to fall, existing bond prices will rise, paving the way for strong capital growth.


The opportunity in stocks is still constructive longer term but there’s uncertainty near term. U.S. equities have rallied strongly to start the year, but it has been predominantly on the back of the euphoria surrounding artificial intelligence (AI). New bull markets are rarely built on rallies with this little breadth. The top 10 companies by market capitalization are responsible for nearly 73% of the S&P 500 Index’s 17.1% return this year. Meaning, it is the companies focused on AI that have driven the S&P this year.


The current potential springboard for equities revolves around the current PE (price/earnings ratio) and is looking favourable for many companies in the general markets. This is exciting because it shows us that they are trading within their long-term average, especially true with European based companies. When PE's contract like this it is usually good for equity returns. In fact, during times of PE contraction the average 12 month return for the S&P is over 12%.


Interest rate impact to equities:

When the Fed, BOC and ECB stop the interest rate increases (and most believe we're in the ninth inning of this process), we see strong changes in the equity markets. In the past, after the FED stops an interest rate hike cycle, the 1-year-forward return for the S&P is over 16%.


The recession has likely been postponed, not canceled, and as we enter the next stage of the economic cycle in the coming quarters, asset allocation focused on quality in equities and bonds will be crucial.


How to press forward:

1. Bonds are back and will revert to their norm in providing three important features to a portfolio:

a. bring returns.

b. provide downside protection and reduce overall risk in a portfolio.

c. will have low correlation to equities.


2. Dividend-paying equities:

a. provide income.

b. often outperform, especially in recessionary times.


3. Diversification:

a. holding a mix of high-quality bonds with the correct mix of duration and credit risk.

b. holding a mix of equities in various sectors so one specific sector will have nominal impact to a portfolio in a down market.

c. geographic diversification, taking advantage of business cycles and opportunities as they present throughout the world.


I know that sounds like quite a request for any portfolio! Well, the thing to remember is that we implement actively managed investments that are tactical and opportunistic. These various investments do all 3 things I mentioned above! This is what good active management strives for, especially true in times of uncertainty. Having actively managed investments is a key to success in getting us to our financial destination.


In addition to this market update, I wanted to remind you again of a critical item in everyone’s estate planning. Probate, which is the process of settling an estate before any assets and money can be distributed to beneficiaries, is becoming more stringent and a long, encumbered ordeal. We can help!

Being segregated funds, our investments bypass the entire probate process, making for a simple and effective transfer of your assets to your chosen beneficiaries. Settling financial affairs quickly and preserving value and time for loved ones is a priority in estate planning. Traditional stocks and bonds, especially non-registered money held in a bank DO NOT provide these benefits. If your parents or other family members are unaware of this, we are happy to assist in the estate planning process. Anyone who has had to act as an executor or who is designated as executor for an existing estate will fully appreciate this advice.


As always, we thank you for your continued trust in business. Please do reach out to me with any questions. I'm always happy to help!


Kind regards,

Roger, RRC.

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