Q4 2022 and Year End Strategy & Market Reviews

Each quarter, our Investment Management teams publish their key observations and portfolio updates across Global Equity and Fixed Income markets. This is a summary of our views for the Third Quarter of 2022. You can download the full reports via the links shown below.


We have just concluded another year of tremendous volatility, although it finished on a positive note. The S&P500 total return for the fourth quarter was +7.6% in US dollars or +6.3% in Canadian dollars. The fourth quarter TSX total return was +6.0%. For the year, the S&P500 total return index was down -18.1% in US dollars or -12.5% in Canadian dollars. The TSX total return was -5.8% for 2022.

While it’s never fun to have a down year, the previous two years featured strong gains. Between 2020, 2021 and 2022, the average annualized total return for the S&P 500 was approximately 9.6%, which is close to the average of the past 50 years.

The losses of 2022 were almost entirely comprised of a forward price/earnings (P/E) multiple contraction of -22.07%, and were slightly offset by a positive contribution from dividends (+1.33%) and positive forward earnings per share of +3.37%. In other words, most of the decline was a result of people willing to pay less for every dollar of earnings in 2022 than they had been previously, mainly as a result of higher interest rates and perceived risk.

Two-year stretches of P/E multiple contractions are rare, and 2021-2022 ranks as the greatest two-year P/E multiple contraction of the past 38 years. Meanwhile, earnings themselves have not collapsed. Current forward earnings growth is still positive for 2023 and 2024 at +5.1% and +10.1% respectively, such that the forward P/E multiples are starting to look reasonably attractive at 16.7x and 15.2x compared to the historical 10-year average of 17.3x. Our experience is that the market begins to look forward to the next year (2024) usually by the second quarter of the current year.

While there are no shortages of negative economic forecasts for 2023, we think there is a reasonable chance for the Federal Reserve to tame inflation and for the economy to remain resilient. Even if we are wrong and we do experience a mild recession, our best guess is that long term interest rates will fall, which would lead to P/E expansion and support for market valuations – potentially reversing the historic P/E contraction of 2022. 

Peter Jackson, HBSc, MBA, CFA

Chief Investment Officer

Portfolio Manager, North American Equities


During the quarter, our overall equity exposure decreased by 6% to 96%. Our US equity exposure increased from 37% to 38% while our Canadian exposure increased from 53% to 58%. Cash decreased from 10% to 4%. It is important to keep in mind that many of our clients’ portfolios are invested in equities globally, through our North American plus International Equity strategy, meaning that the actual weights of US and Canada within their equity holdings will be proportionately less than this given the 15-20% allocation to international companies.

We have continued to position the portfolio toward value-oriented stocks. Value stocks now make up 63% of the portfolio. Our exposure to growth stocks was trimmed by about 1% to 29% of the portfolio. Staples, which we don’t classify as either growth or value, make up the ~8% balance of our equity exposure.

During the quarter, we added a number of new stock positions, including: 

Enghouse Systems Ltd. acquires and integrates technology companies. After a brief lull, it’s most recent quarter showed stronger revenue and EBITDA growth. This Canadian company also announced two acquisitions that should re-accelerate growth.

Arthur J Gallagher & Co is one of the leading insurance brokerage, risk management, and human capital consultants in the world. We like this business and consider it defensive, as most insurance purchases are non-discretionary. 

Eaton Corp. PLC is a power management company that benefits from the shift to renewable power. New orders and backlogs have accelerated, and secular tailwinds should support prolonged revenue growth at mid-to-high single digits.

Elevance Health Inc. is one of the largest health benefits companies in the United States. We like the demographic-driven stability and growth characteristics of health care, and believe the company is well positioned to benefit from this trend. 

A more detailed review of each company can be found in the full report per the link above.



Phil D’Iorio, MBA, CFA
Portfolio Manager, Global Equities

Download Full Commentary


Inflation was percolating at the start of 2022, and the war in Ukraine served as a catalyst to drive it even higher. In response, central banks aggressively hiked interest rates as you have seen. Against this backdrop, both stock and bonds lost money. Since 1926, there have only been two calendar years when stocks and bonds were both down.

We believe that a changing of the guard may be unfolding in terms of stock market leadership. During the fourth quarter, the MSCI EAFE and MSCI Emerging Markets Indexes both outperformed the MSCI USA Index. This trend may continue after 15 years of outperformance by the United States, thanks in part to a fading US dollar.

We are cautiously optimistic about 2023. Inflation is showing signs of cooling, which means we may be getting closer to the end of rate hikes. We believe that the companies we own, with stable earnings, low leverage, and pricing power, are well positioned for 2023. And history suggests that forward returns are typically strong in the aftermath of a bear market.

We recently added several new stock positions, including Arthur J Gallagher & Co and Eaton Corp, which are highlighted on the previous page. We also added:

Avery Dennison is a materials science company specializing in labeling and functional materials with dominant market share, pricing power and economies of scale.

FinecoBank is one of the most established online banks in Italy and stands to benefit from the wealth transfer to younger generations and higher interest rates.

Keyera Corp is an integrated energy infrastructure business with extensive interconnected assets and a generous dividend yield.

Keysight Technologies is a global leader in testing and measurement equipment with exposure to several themes that we like, including electrification and reshoring.

A more detailed review of each company can be found in the  full report per the above link.



Owen Morgan, MBA, CFA
Portfolio Manager, Fixed Income

Download Full Commentary


During the last quarter of 2022, fixed income also markets continued to wrestle with three things: inflationary data, ongoing interest rate hikes and elevated recessionary risks.

In December, The Bank of Canada made two statements that highlight recent uncertainty. First, the Bank noted that “its Governing Council will be considering whether the policy interest rate needs to rise further,” potentially signaling that the rate hike cycle is close to an end, then noting that the “annual run rate inflation is still too high, and short-term inflation expectations remain elevated,” leaving the door open for further hikes.

Like Canada, the headline economic story in the US was inflation. The market currently expects another 50-75 bps of overnight interest rate hikes in 2023, and for the rate to peak at 5.0% in June. We anticipate that, like the Canadian situation, the Fed will pause and watch the state of the economy in the second half of 2023 before making further moves.

Subtle shifts in the Bank’s commentary and five consecutive months of declining inflation in both countries have us feeling more positive than we have in months.

Firstly, we believe we are near the end of the rate hike cycle, and therefore the impact of higher rates on fixed income securities should soon end, barring any unforeseen shocks. Secondly, there is a risk of a recession in our view, but we believe it will be mild. Consensus forecasts of Canadian and US GDP expects positive growth in 2023 and the labour markets in both countries remain tight.

With a rate hike or two still likely, we maintain a shorter duration than the benchmark. Some of the investment opportunities in the 2-3 year range offer yields that are almost as attractive as those maturing 7-10 years out, and we don’t believe the relatively minor additional yield of longer bonds compensates us adequately for the additional maturity risk or remaining interest rate risk.

We believe the current yields are more compelling than they have been in many years. As a result, we are looking for opportunities to lock in investments for the benefit of our client portfolios. To get a deeper understanding, you can read the full report via the link above.

Q3 2022 Strategy & Market Reviews

Each quarter, our Investment Management teams publish their key observations and portfolio updates across Global Equity and Fixed Income markets. This is a summary of our views for the Third Quarter of 2022. You can download the full reports via the links shown below.


Market volatility continued through the third quarter – initially to the upside, with the S&P 500 rising almost 14% through mid-August only to finish the quarter down -4.9% in US dollars, or modestly up +1.9% in Canadian dollar terms. The TSX total return was -1.4% for the quarter.

Famed investor Martin Zweig coined the phrase “Don’t fight the Fed” in the 1970s and it still rings true 50 years later. In September, Federal Reserve Chairman Jerome Powell reminded markets about what he previously said at Jackson Hole in August 2022:

“Restoring price stability will likely require maintaining a restrictive policy stance for some time… We will keep at it until we are confident the job is done.”

Indeed, the futures market now seems to be expecting another 100-125 basis point increase in interest rates between now and year end. This is on the heels of downgraded GDP projections through 2024, higher expected unemployment, and the expectation that it will take until 2025 for inflation to return to the Fed’s target 2% range. 

The question now is how the stock market will react. In previous drawdowns, the market’s path has depended on whether or not a recession develops. Certainly, the odds of a recession is higher after the latest Fed rate move and new projections. However, if there is a silver lining, it is that the distance between where we are today and historic low points is about -5% to -10%, suggesting most of the damage may be done.

Our strategy is to concentrate on owning high-quality companies with lower volatility, consistent earnings and strong and growing dividends combined with some extra cash reserves on the sidelines. We feel we are well positioned to weather the turbulence and participate in the upside that may come given that we are likely now closer to a market bottom.

As we have pointed out in the past, the true beginning of a new bull market typically doesn’t feel like a very comfortable time to invest when it may just be the best time to do so.


Peter Jackson, HBSc, MBA, CFA

Chief Investment Officer

Portfolio Manager, North American Equities

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During the quarter, our overall equity exposure increased 1% to 90% from 89% at June 30th. Our US equity exposure decreased from 39% to 37% while our Canadian exposure increased from 50% to 53%. Cash decreased from 11% to 10%. It is important to note that many of our clients’ portfolios are invested in our North American plus International Equity strategy, meaning that the actual weights of US and Canada within their equity holdings will be proportionately less than this given the allocation to international companies.

Currently our portfolio is positioned toward value-oriented stocks making up 56% of the portfolio versus 53% at June 30th while maintaining exposure to growth stocks at around 30% of the portfolio, which was down slightly from 32% at June 30th. Staples, which we don’t classify as either growth or value, make up the 4% balance of our equity exposure.

Our shift to value included one new purchase:

  • Linamar Corporation is an advanced manufacturing company composed of two operating segments – the Industrial segment and the Mobility segment, both global leaders in manufacturing solutions and world-class developers of highly engineered products. 

In the latest quarter, Industrial and Mobility sales grew 28.2% and 25%, respectively, on strong pricing and market share gains. The company is also having great success winning new business with their new business book now at $4.9 billion, which should add $600-800 million of revenue in each of the next two years on a current revenue run rate of about $7.5 billion. Linamar currently trades at just 7.2x next year’s earnings.

Given the recent pullback in energy through the third quarter, we also took the opportunity to increase our exposure slightly in existing portfolio names Keyera Corp. and Topaz Energy Corp. A complete review of new companies purchased and additions during the quarter can be found in my full report.


Phil D’Iorio, MBA, CFA

Portfolio Manager, Global Equities

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The challenging market conditions during the third quarter were global in nature as equity markets throughout Europe and Asia experienced significant bouts of volatility just like the S&P 500. Market volatility during Q3 was driven by the same factors that led to the weakness in the first half of the year – inflation, tightening by central banks, and the war in Ukraine.

During the third quarter, portfolio activity remained busy as we continued to reduce our cyclical exposure and increase our weight in defensive areas such as Consumer Staples. Some of the notable activity during the quarter included a reduction of our weighting in Accenture (Technology) and Howden Joinery (Building Materials), and establishing two new holdings:

  • Pernod Ricard is the world’s second-largest spirits manufacturer, with brands like Absolut, Chivas Regal, The Glenlivet, Jameson, Malibu, Martell, and Beefeater. The company has been able to generate above-average growth with strong pricing power and a presence in fast-growing emerging markets such as China and India.
  • Heineken is the largest brewer in Europe and the second largest brewer in the world. The company has more than 300 brands and sells its products in more than 190 countries around the world, including high-growth markets across Asia, Africa and Latin America.

As we look ahead, we are cautiously optimistic. The valuations in our portfolios are now much more attractive, we are positioned defensively, and investor sentiment has reached levels seen at the bottom of the Great Financial Crisis in 2008-09 and the COVID pandemic in 2020.

Another reason is history: once the S&P 500 has a 20% drawdown, there is a strong likelihood of positive returns over the next 1, 3, and 5 years. At its September 30th low, the S&P 500 was down nearly 25% from its highs on a year-to-date basis. This is not too far off the average bear market decline of 33%. This leads us to believe that we are getting closer to a bottom.


Owen Morgan, MBA, CFA

Portfolio Manager, Fixed Income

Download Full Commentary

The drivers of fixed income valuation and performance in Q3 2022 remained similar to those we spoke about for the first half of the year, resulting in a modest quarterly gain in total return. Inflation remained Public Enemy Number One, peaking at 9% in the US and 8% in Canada, before receding through quarter-end due primarily to declining energy prices.

Both the Federal Reserve (Fed) and the Bank of Canada (BoC) hiked their benchmark interest rates very aggressively in response to extended inflation concerns. The BoC raised its benchmark interest rate 1% on July 13th, and another 75 bps on September 7th. This brought the overnight interest rate to 3.25%, its highest level since 2008, and it is now forecast to top out at close to 4%. The Fed rate is now expected to peak at slightly less than 4.5% by the end of March 2023.

Discussion of a global recession has continued with increasing prices, consumer debt burden, employment levels and supply chain issues consuming the majority of the bandwidth for slowing growth theories in several key markets.

From here, it will be a balancing act between controlling inflation, managing any recessionary signals on the horizon and responding to other forces at play globally, such as the war in Ukraine, the energy markets, and macroeconomic shocks like the UK government delivered a couple of weeks ago with an unrealistic budget program.

Turning to the fixed income markets specifically, current bond yields have become more appealing. We see attractive opportunities for both conservative shorter- to mid-term duration government bonds and higher quality corporate bonds.

Interest rates will continue to fluctuate, and may drift moderately higher, causing some short-term decline in bond values, however, we believe the current yields are more compelling than they have been in many years. As a result, we are looking for opportunities to lock in investments for the benefit of our clients over time.

Kipling Strategic Income Fund

The Kipling Strategic Income Fund had a solid August 2022 relative to its benchmark. The M series of the fund generated a return of +0.1%, while the benchmark returned -2.2%. We have positioned the fund to have a shorter duration than the benchmark. This positioning benefitted our unitholders in August.

The bond market seems to be searching for direction and trying to decide if inflation or recession is the bigger risk. On July 27th, the Federal Open Market Committee (“FOMC”) in the United States raised the Fed funds rate by 0.75%. However, comments made in the press release and at the press conference by FOMC Chair Jerome Powell were deemed “dovish” by the market and the bond market rallied (interest rates went down/bond prices went up). The following Friday, strong employment data in the U.S. caused the market to fear that more interest rate increases were likely, and the bond market sold off. The following week, U.S. inflation data was slightly lower than forecast and the bond market rallied yet again. As August wore on, the bond market generally drifted lower.

We believe central banks in Canada and the United States are very focused on reducing inflation. Consequently, central banks will continue to increase short-term interest rates through at least late 2022 and will be reluctant to reduce interest rates. In early August, markets were pricing in four interest rate increases from the FOMC, followed by three interest rate cuts before the end of 2023. In our opinion, this bordered on irrational exuberance.

In a speech on August 31, Loretta J. Mester (President of the Federal Reserve Bank of Cleveland and a FOMC voting member) said of interest rates that “I think we’re going to have to move them up … above 4% and probably need to hold them there next year,”. Similarly in an August 30 speech, John C. Williams (President of the Federal Reserve Bank of New York and FOMC Vice Chair) said that the possibility of interest rates cuts in 2023 was “very unlikely”.

The yield curve is relatively steep in the extreme short end, but flattens in the 2-5 year range. Based on this yield curve, moving from 2 year (4.99%) to 5 year (5.05%) only adds 6 basis points in yield, but should increase interest rate sensitivity (which could be a proxy for volatility) by 150% all else equal. That is not a worthwhile trade-off in our opinion. Consequently, the duration of the fund is approximately 1.91.

Figure 1: Bloomberg Canada BBB+, BBB, BBB- Yield Curve


Source: Bloomberg as of September 2, 2022

We have positioned the Kipling Strategic Income Fund to have a shorter duration than the benchmark (1.91 vs. 5.34) and to have a higher yield-to-maturity than the benchmark (7.1% vs. 4.4%). In an environment where all interest rates move higher, the fund should outperform the benchmark due to its’ shorter duration and higher yield-to-maturity. In an environment where interest rates are unchanged, the fund should outperform due to its’ higher yield-to-maturity. In an environment where all interest rates move lower, the fund should underperform. However, the underperformance should be mitigated by the higher yield-to-maturity and should still be positive as all bonds would increase in value (all else equal). We think this is the best way to position the fund in the current environment.

Second Quarter Fixed Income Strategy Review

The second quarter of 2022 echoed many of the themes evident in the first quarter. Inflation in both US and Canada exceeded already lofty expectations and climbed to levels not seen since the early 1980s. The Federal Reserve and the Bank of Canada hiked rates sharply and aggressively in response. Oil, a primary driver of inflation, hit multi-year highs as well, as the conflict in
Ukraine entered a new, possibly more protracted stage, roiling energy markets. The impact to financial markets, although not as severe as the first quarter, was steeply negative across most asset classes.

Q4 2021 Strategy & Market Reviews

Each quarter, our Investment Management teams publish their key observations and portfolio updates across Global Equity and Fixed Income markets. This is a summary of our views for the Fourth Quarter of 2021. You can download the full reports via the links shown below.


Happy New Year and Good Riddance to 2020! That is what we wrote last year at this time and it kind of feels like ground hog day. The good news is the returns were even better in 2021 than 2020. The bad news is that, as we write this, Omicron is reproducing at a rate far exceeding earlier variants and second only to measles. However, cases so far seem to be less severe, resulting in fewer hospitalizations and deaths. We are leaning towards this wave being short-lived.

During the fourth quarter of 2021, the S&P500 total return index gained +10.7% in Canadian dollar terms and the TSX total return index was up +6.5%. This put their annual returns at 27.5% and 25.2%, respectively. Not too shabby.

A continued rebound in economic strength and better-than-expected earnings propelled the markets higher. It also set the stage for the completion of the Fed’s $120 billion per month bond buying program in the first quarter of 2022 and for a higher federal funds rate as early as March 2022. Although the impact of Omicron is not fully known and could influence events, we have gone from pricing in zero rate hikes in 2022 to expecting three of them by the beginning of 2023.

For perspective, the last tapering/tightening cycle took place from December 2013 to December 2018. The S&P500 gained +74.7% through eight rate hikes from the beginning of the taper until September 2018. The sell-off finally came in Q4 2018 when Fed Chairman Powell signaled more aggressive rate hikes to come. Powell remains the Fed Chairman today, and likely does not want to repeat this policy error. If he is successful, we think investors will soon look forward to the 2023 earnings forecasts, which look pretty good. 

While we are not a pure play on sustainable investing and ESG is not integrated into our investment process at this time, I would like to mention that we do continue to score materially better than our benchmarks on Environment, Social and Governance (ESG) criteria. We believe that owning high quality, compounding companies led by experienced executives and savvy boards is not only sustainable, but also a beneficial approach to take in the current market environment.

Peter Jackson, HBSc, MBA, CFA

Chief Investment Officer

Portfolio Manager, North American Equities

During the quarter, our overall equity exposure increased by 1% to 97%. Our US equity exposure increased from 47% to 50%, while our Canadian exposure decreased from 49% to 47%. Cash decreased from 4% to 3%. It is important to note that clients invested in our North American plus International Equity strategy will have proportionally lower weights to the US and Canada given the allocation to international companies.

We have continued to position the portfolio toward value-oriented stocks to benefit from the economic recovery that is underway. They now make up 58% of the portfolio, while maintaining exposure to growth stocks for about a third of the portfolio. Staples, which we don’t classify as either growth or value, make up the balance of our equity exposure.

During the third quarter, we added two new stock positions:

Rogers Communications Inc. is emerging from a period of significant underperformance versus its peers, despite strong operational performance, due to a well-publicized boardroom fight, which we thought was nearing an end (a subsequent court ruling has now essentially settled the issue). Rogers has the best operational leverage to a slowly reopening economy relative to its peers, material synergies from its proposed merger with Shaw Communications and an EV/EBITDA valuation discount to its peers at the highest level in over six years. 

SVB Financial Group is a fast-growing bank with strong roots providing banking services to venture capital-backed companies resulting in significant exposure to higher growth verticals such as Technology and Healthcare. In recent years, SVB Financial has transformed itself from catering to start-ups only to now providing large companies with traditional banking products that go well beyond the IPO stage. SVB meets our bank scoring criteria given its low Return on Asset variability and high tangible book value growth.

Phil D’Iorio, MBA, CFA

Portfolio Manager, Global Equities

2021 was an interesting year for global equity investors to say the least. Stocks surged on the back of a global vaccine rollout, investors embraced cryptocurrency as Bitcoin soared to new heights, and the Metaverse became a mainstream concept with Facebook changing its name to Meta Platforms in a symbolic move. 

Compared to the roller-coaster of last year, 2021 was much steadier and generated very strong returns with significantly less volatility. The MSCI World Index increased by 20.1% and the Euro Stoxx 600 Index increased by 22.3%. Emerging Markets were notable laggards as the MSCI Emerging Markets Index declined by -4.6%. Robust stock market gains were driven by ongoing improvements in the global economy and progress with vaccinations. 

In 2021, our research efforts were highly productive in terms of generating new ideas for our portfolios. As a result, we initiated nine new holdings across the Global and International strategies, which are detailed in my full report.

We expect the economic recovery to continue in 2022. However, as we look ahead, we view higher inflation as one of the key risks for the global economy. Economists and policymakers hope that it will be transitory, but if it remains stubbornly high, central banks may be forced to raise interest rates sooner and at a faster rate than the market currently expects. 

Instead of trying to predict the future rate of inflation, we have positioned our portfolios for a wide range of scenarios. We believe the best way to do this is to invest in high quality companies, or what we refer to as Quality Compounders. These companies have strong market positions, sustained pricing power, and seasoned management teams that can adapt to changes in the economic environment.

In summary, while we are cautiously optimistic about global equity markets, we are even more optimistic about the companies that we own across our portfolios. Our global and international mandates continue to be constructed with high quality companies that are well positioned to compound the value of their businesses in the years ahead.

Diane Pang, CPA, CA, CFA

Portfolio Manager, Fixed Income

Just as we thought the Delta variant would be our focus, another variant emerges – Omicron. By the way, the CDC is currently tracking 12 variants, with Delta and Omicron being the two of most concern. During the quarter, markets reacted to the surge in COVID-19, as well as a surge in inflation. The result was overall positive.

In the US, crisis was averted as the house and senate voted to increase the debt ceiling by $2.5 trillion to $28.9 trillion just days before the Treasury Department warned it would no longer be able to pay the nation’s bills. This leaves the country with enough spending power to cover its deficits until beyond the November 2022 midterm elections.

On November 22nd, President Biden announced his intent to nominate Jerome Powell to another four-year term as the Federal Reserve chair. Later in November, Powell retired the word “transitory” to describe inflation and indicated that the Fed would end asset purchases earlier than originally planned to help bring it under control.

The Bank of Canada appears to be following suit. It had two meetings during the quarter and wasted no time during the first of those meetings to announce the end to tapering. The Minister of Finance and Bank of Canada also concluded their review and renewal of the monetary policy framework that occurs every five years, confirming the Bank’s commitment to using a flexible inflation target strategy. Details of the framework are contained in my full report.

On December 16th, the Bank of England became the first major central bank to hike its overnight interest rate, citing inflation of 5.1% and anticipating a peak of 6% by early 2022.

It seems clear that by the end of this year, overnight interest rates in most major markets will be higher than they are today. We know from experience that the yield curve will move ahead of actual rate hikes, so we are patiently buying bonds at or near par and of shorter duration in order to preserve capital. As volatility increases, we believe there will continue to be pockets of opportunity to lock-in higher yields as there were during the past quarter.

Second Quarter North American Equity Strategy

During the second quarter of 2021, the S&P500 total return index was up +8.6% in US dollars. Adjusting
for currency, the S&P500 returned +7.0% in Canadian dollars, as the Canadian dollar appreciated about 1.2
cents, closing the quarter at US$0.807. The TSX total return in the second quarter was +8.5%, as can be seen
in greater detail in Appendix 2. The biggest performance driver was positive earnings growth in both markets.
While earnings were expected to be strong, actual earnings in the first quarter for the S&P500 rose 52.5%
year over year as compared to an expected gain of 23.7% at March 31st, far exceeding market expectations.

Q1 2021 Strategy & Market Reviews

Each quarter, our Investment Management teams publish their key observations and detailed portfolio updates across North American, Global and Fixed Income markets. This is a summary of our views for the First Quarter of 2021. You can download the full reports via links shown below.


Probably the best way to describe the US economy today is “smoking hot.” Corporate earnings continue to beat expectations. The ISM manufacturing index, which surveys purchasing managers at more than 300 US companies, recently recorded its strongest reading since 1983. Meanwhile, a similar index for global markets hit a 10-year high.

The largest vaccine rollout in history is underway. It has been estimated that more than 700 million doses have been administered globally. Despite some worrying trends, the average rate of inoculation is outpacing the rise in new cases.

The combination of record earnings, positive economic data and vaccination progress drove stocks higher. During the first quarter of 2021, the S&P 500 total return index was up +6.2% in US dollars, or +4.9% in Canadian dollars, as the Canadian dollar appreciated about 1.0 cent. The TSX total return in the first quarter was strong at +8.1%.

Between the US Treasury’s US $1,400 stimulus cheques issued to 250 million Americans in March (adding even more fuel to the fire) and the Fed sitting tight on interest rates, the bond market is trying to estimate inflation while the stock market attempts to forecast earnings. Whether that results in a short-term pullback, a more serious correction, or revised earnings expectations, only time will tell. 

The bottom line is that the market appears to be pricing in a lot of good news and the risks have now increased. While our outlook remains positive, we have raised a little cash and will pause for the moment to see how this sorts itself out in the second quarter.


Peter Jackson, HBSc, MBA, CFA

Chief Investment Officer

Portfolio Manager, North American Equities

Our US equity exposure decreased from 52% to 48% during the quarter, while our Canadian exposure increased slightly to 46%. Cash rose from 3% to 6%. Many of you  who follow our North American Plus International global strategy will have a roughly 20% allocation to international equities, which means the US and Canada weights will be lower.

We now have more than half of the portfolio invested in the value end of the spectrum to benefit from the economic recovery, while maintaining about a third of the portfolio in growth stocks. Staples, which we don’t classify as either growth or value, make up the balance of our equity exposure.

We added three new positions in the first quarter of 2021:

Intact Financial is a Canadian insurer of homes and autos. Company management has a stellar track record both in operating the business and in making accretive acquisitions, including a pending acquisition of RSA Group of the UK, which we believe will prove to be a real winner.

Dollarama Inc. is the largest dollar store chain in Canada, with 1,300 company-operated stores and plans to reach 1,700 stores by 2027. The company has acquired a majority stake in Dollar City, a 240-store chain in Latin America with a market about 4x larger than Canada.

U.S. Bancorp is the 5th largest commercial bank in the United States by assets and one of the most profitable based on return on equity. As the US economy recovers from COVID, we believe the company will experience a rebound in its fee-based businesses and will benefit from an improved credit outlook in 2021.


Phil D’Iorio, MBA, CFA

Portfolio Manager, Global Equities

Unlike most recessions, which are typically triggered by economic imbalances or central bank action, the recession of 2020 emerged out of left field. And, unlike most recoveries, where households, corporations and governments typically need time to regain their footing, everyone is flush with record amounts of cash and ready to spend.

As we exit the pandemic, there will be substantial demand for dining out, travel, sporting events, and concerts. There is also a US $2 trillion infrastructure proposal in the United States. We currently see a path to a strong global economic recovery with a level of growth that is likely to be the strongest in decades.

Now let us consider some of the risks. There are new variants of the virus, valuations are elevated, and there are concerns about the potential for inflation. Although each of these risks is significant, we believe they are all manageable.

As you know at Cumberland, the companies we own are profitable across the business cycle, generate strong free cash flow, hold leadership positions in attractive industries globally, and are, in many cases, emerging from COVID even stronger than before. We are confident that they can handle some setbacks that will eventually materialize down the road.

We view equities as the preferred asset class to benefit from the recovery. The US economy has performed well over the last decade and we expect this to continue. However, we believe there is catching up to do in both Europe and the Emerging Markets, which have gone through several years of lacklustre growth. Our global mandates have exposure to these economic regions and are well positioned to benefit as the recovery unfolds.


Diane Pang, CPA, CA, CFA

Portfolio Manager, Fixed Income

In January, the Bank of Canada (BoC) signaled its intention to reduce the buying of Government of Canada securities. The expectation from economists is that the Bank of Canada will taper its buying from $4 billion/week to $3 billion/week as early as April, as they gain confidence in the strength of the recovery.

On Feb 23rd, the BoC reduced its buying of provincial bonds in the secondary market from twice a week to once a week and reduced the maximum from $500 million to $350 million. Similarly, the Bank reduced their buying of corporate bonds from $200 million per week to $100 million per week.

This slowdown in bond buying is a signal that Canada’s economy requires less help to emerge from the coronavirus crisis. Indeed, the BoC upgraded its economic forecast in March. Nonetheless, we, as taxpayers will ultimately be left to deal with the ballooning level of federal and provincial government deficits that remain.

With stronger economic growth comes the possibility of interest rate increases, but the BoC has reiterated that they will not increase rates until inflation of 2% is “sustainably achieved.” We believe that we are very likely to see near-term spikes above 2%, and the question will be whether this is sustainable or not. The Bank of Canada kept its overnight rate unchanged in Q1 at 0.25% and the Federal Reserve also kept its rate unchanged at 0%.

At the end of the Q1, 88% of the bonds in the Canadian Bond Universe traded above par, compared to 99.5% at the end of 2020. As a result, the Index yield rose from 1.21% to 1.72%. The market clearly needed to take a breather and we believe there could be a bit more downward price pressure (and higher yields) to come. We are now taking advantage of lower prices to selectively lock-in some yields and reduce the risk of capital losses. 

Where are we headed in 2021?

Gerry Connor

Let’s start with a broad overview of where we are and where I think we might be headed.

Right now, the news is pretty encouraging.

  • The US seems to be moving to a new and hopefully kinder and more inclusive administration.
  • An additional $900 billion in government stimulus has been approved and President Biden is preparing to ask for an additional $1.9 trillion. Economists now believe that government spending can bridge the COVID gap until we reach vaccine stability.
  • COVID-19 vaccines are being rolled out which promises a “coming out” party by the second half of this year as the service side of the economy recovers.
  • Federal Reserve Chairman Powell has confirmed that the Fed will maintain its ultra-easy monetary policy.
  • Fourth quarter earnings reports are so far coming in ahead of forecasts.

So, things look pretty good and the market averages are reflecting this by reaching new all-time highs.

But, what’s ahead and what could go wrong?

At some point the market will look ahead to where we will be in six months if all this plays out. If the economy is at full throttle, it will start to absorb some of the liquidity that has fueled this market. In a normal cycle, the Fed injects liquidity into the system during a recession. It isn’t initially used by businesses and consequently flows into financial assets. Bond prices go up, interest rates decline and the stock market recovers. But as the economy recovers it eventually needs some of the liquidity to sustain itself. Inventories have to be rebuilt, capital spending picks up and more people are hired.

And where does this money come from? Usually, the financial markets.

So, if the economy is screaming by next fall, as some economists forecast, I’m not sure that will be good for equities.

Furthermore, the market seems to have dismissed Biden’s election agenda as his initial focus is likely to be resolving the Corona virus pandemic. But later this year, the emphasis is likely to shift to his stated objectives which now look to be on the 2022 agenda.

This might include:

  • Higher corporate and individual taxes
  • Higher regulatory oversight
  • New Social and Economic policy
  • The Green new deal
  • Health care reform
  • Student loan forgiveness
  • Spending on infrastructure
  • Higher deficit spending
  • A concern that the Blue Wave turns into a tsunami of social policies implemented by progressives which will represent a radical regime change from the Trump Administration.

Although this might give the market some cause to pause, the reality is that the Democrats don’t likely have enough votes for sweeping change. Votes on significant legislative change will require 60 votes in the Senate where the chamber is currently split at 50 seats by each party. Furthermore, you have some conservative Democrats like Joe Manchin from West Virginia who are unlikely to go along with radical change.

So, the market doesn’t see much to worry about this year.

However, concerns may arise as to how long the Fed can maintain its ultra-accommodative monetary policy. Inflation could and should pick up, especially with a weak US dollar that causes import prices to increase and rising commodity prices. Interest rates in the face of record fiscal deficits could rise causing a steeper yield curve as liquidity is unwound.

An additional concern is whether the Coronavirus will really be gone. What if it mutates to a strain that isn’t controlled by today’s vaccine? Or, worse yet, what if we find that after some time the vaccines have some unforeseen side effects? An Agent Orange reaction might occur.

Current Market

So, with this as a background, let’s look at what has been happening in the stock market. As I said, the economy is doing well. Globally, the manufacturing PMI’s for December were 60.7 in the US, with new orders even better at 67.9. Europe was at 55.2 and China 51.9. (Anything over 50 signals growth). Not surprisingly, consumer spending on tech hardware and software rose 32.8% in the first ten months of 2020 to a record high. But none of this should come as a surprise. Coming out of a recession there is pent up demand that gets released, especially if the government sends you a free check. Manufacturing has to go into overdrive to keep up with this demand and to rebuild depleted inventories. So, production actually increases faster than final sales initially. However, one has to anticipate pent up demand being satisfied and inventories being restocked which will lead to a slowdown. This is usually about twelve-month cycle and will hopefully be offset somewhat by a recovery in the service sector as the COVID-19 vaccine allows for travel and entertainment.

All of this is good news relative to where we have been. But, when translating it to earnings we won’t get back to where we were in 2019. Right now, earnings growth for last year only shows improvement with Q1 – 15.4%; Q2 -32.3%; Q3 -8.2%; Q4 -6.7% est.. For last year earnings for the S&P 500 are estimated to be $136 while forecasts anticipate $168 in 2021 and $196 in 2022, although some of the benefits of government spending will be given back through tax increases in ‘22.

This leaves the S&P 500 trading at 22.9X forward earnings and at 2.54X revenues which exceeds the “tech bubble” of 1.88X in Q2 of 2000. Right now, 52.9% of the S&P companies trade at over 20x earnings. Bottom line, the market is far from cheap which would appear to limit its upside.

However, as I have pointed out in the past, there is a disparity between the more economically sensitive value stocks and the disruptive technology and stay at home growth companies. So, instead of the market correcting, you could see a rotation from growth to value and in fact, that is exactly what we have experienced.

What is behind this? Well, for sure the overall valuation level of the market is due to the Federal Reserve’s liquidity policy. There is an enormous amount of money around and the economy is not yet fully taking advantage of it with the services industries still shut down. In fact, the reaction to the Covid virus has left a record $4.6 trillion sitting in savings accounts and money market funds.

But there has been a subtle change. On August 4th the yield on the ten year US Treasury note bottomed at .52% and has now risen 63bps to 1.15%. Interestingly, we saw a peak in the relative performance of growth over value on August 28th, with many technology and FANG stocks spiking to highs at the end of the month only to be followed by lower prices as the market made new highs. Conversely, value companies showed extraordinary gains in November after the US elections on the promise of more fiscal economic stimulus. Fundamentally, this makes sense. The performance of growth stocks is highly dependent on the discount rate. Without getting too technical, valuation or price earnings ratios move higher when interest rates decline, and conversely, when they rise as has happened since the end of August. For Value stocks, earnings generally improve as interest rates move higher. For banks which are one of the largest components of value the correlation should be obvious as higher rates make lending more profitable. For others, rising rates usually correspond with higher inflation, which equates to better pricing power by economically sensitive companies.

The question which is still unanswered is whether this shift will continue. Although this is currently undetermined, there are signs that this may be more secular than just transitional. Although bond yields have risen, they are still extremely low by historical standards after a forty year bull market for bonds. Meanwhile, the new regime in Washington has an agenda focused on stimulation and increased deficit spending. Furthermore, the US dollar is declining, which will put upward pressure on import prices. Commodities are also increasing supported by the strength of housing and the emphasis on electrification of autos and solar and wind power, Biden’s Green New Deal.

Stimulus checks on top of $4.6trillion in savings could also put pressure on consumer goods prices which may also face pressure from rising costs and higher taxes. And finally, the trend to reshore manufacturing will add costs.


So, higher taxes and other major Democratic initiatives will be a 2022 problem while economic progress in the second half of this year might start to unwind some of today’s bullish market under pinning. Although higher interest rates will initially be tolerated as they will be considered a good sign of economic recovery, they should also change the complexion of the market in favour of the more economically sensitive value companies.

Market Hindsight & Foresight

Join Portfolio Managers, James Nickerson, Jason Isaac and Derek VanGenderen from our Calgary office for their reflections on the market, where they think it is going, asset allocation and valuations.  You will also learn how your portfolio is positioned for 2021.

They cover:

  • A review of 2020 (0:47)
  • What’s happening in your managed portfolio (16:22)
  • Their favourite stocks and sectors (21:30)
  • What they see going into 2021 (26:45)

Download the recording by using the three dots on the right to navigate through the sections more easily.

Cumberland Market Review & Outlook

2020 has been a challenging year in so many ways. In our world of investing, in trying to be the best stewards of our clients’ capital, we take great pride in how we have performed. Watch the 30 minute video to gain insight into how we invest, what we are looking at and what we are buying for our clients and for ourselves.