If you have been a client of mine for while now you know I send out a quarterly newsletter discussing our current financial climate. With our continuous growth in audience I thought it was necessary to make it accessible online. The newsletter will now consistently be posted on LinkedIn and our website. As always, thank you for reading.

 

And so it begins…

 

Much like myself, I’m sure most of you are already feeling inundated with political fodder both south, and more recently north of the 49th parallel. While there’s likely going to be more where that came from, I wanted to speak of a new beginning. That being the easing of US interest rates. It’s been 30 months since the start of higher rates and with higher rates came some unexpected results. As I’ve mentioned before, quite literally nobody predicted the US economy continuing to chug along unabated despite generational high’s where interest rates are concerned. This quarter I’m going to attempt to touch on what this means for clients, the economy, and what surprises we could be in store for.

 

When the going gets weird…

 

There’s an old traders adage that when the going gets weird, the weird get flat. This concept refers to the belief that when things get weird or uncertain, traders flatten out their positions by limiting their overall exposure. While we tend to embrace the benefits of being longer term investors, we are starting to raise cash positions in most accounts. This isn’t to say we expect a big drop in equity markets( the overall US economy is still quite strong), however, we are expecting some volatility. This is for 2 main reasons,…first, statistically speaking, September is the worst month for equity markets, with most global exchanges correcting over 5% in 9 of the last 10 years. Second, add in what could be a ‘down to the wire’ type election in the U.S. It’s fair to say that money is starting to pile up on the sidelines as there is no clear front runner in an election that has 2 very different potential fiscal and monetary policies. For our clients lower rates will likely mean more reliance on dividend paying equities vs fixed income, as well as the potential to pick up some very good investments at better prices. I’ll keep you posted on how this develops, but we are working on these themes as we write.

 

It’s all about the discount function…

 

In one of my past notes, I wrote about how the discount function would affect stock prices. This was in response to nearer term weakness in stocks back in 2022 when we had a huge change in interest rate policy and the start of the most aggressive rate hikes in North American history. What the discount function does is it discounts future earnings, using risk free interest rates (T Bills) as the baseline. This allows investors to adjust stock prices based on what they can get return wise in the “risk free” environment. As those rates climbed higher, stocks slumped, mostly in response to a much higher discount on future earnings. The good news is that this works in reverse. Generally speaking, the lower the risk free rate, the lower the discount on future earnings. In a vacuum, this is fundamentally good news for stock prices. There is of course the caveat of “why” we are lowering interest rates. This can lead investors to believe trouble is ahead and sell of stocks, based on sentiment alone. We have spoken at length about how the U.S. economy has a lot of good underpinnings, and as a result believe that near term noise will be an opportunity to put capital to work in a much more predictable environment. At the same time, while there is a lag, a lower U.S. rate opens the door for Canada to be more aggressive with future rate cuts without jeopardizing the value of the Canadian Dollar. This is good news all around for a Canadian economy that is far more interest rate sensitive than the U.S.. Again, generally good news.

 

Vegas had it wrong…

 

Obviously I’d be remiss if I didn’t touch on the implications of the U.S. elections in November. While it looks to be a close race at this point, anything can happen. Regardless of the victor, I have to think that the fundamentals of U.S. financial markets are quite strong, and this will have a stronger effect on markets than either parties victory. At the same time I will never forget the U.S. election of 2016. In fact, I have a scar to prove it. I remember it being a Tuesday night, which meant I had a hockey game. A fellow player raised his stick a little high, and the next thing I knew, my lip was bleeding…and how! After a quick look by a fellow teammate I drove myself to the emergency room. Suffice to say it was a busy night…I think I was there for a solid 6 hours. At the beginning of the night, Hilary Clinton was way ahead in the polls. Even the gamblers in Vegas had her at an 80% likelihood to win. By the time I left, with 5 stitches in my mouth…Trump was President. This is all to say that our job here is to expect the unexpected. Another term for it is tail risk. Sometimes, the completely unexpected happens. As previously mentioned, in general, we are well prepared, regardless of the winner.

 

What’s next…

 

It’s clear that things change…constantly. I recently read a book by Morgan Housel titled Same as Ever. The concept is that things change, but humans are fairly predictable. So while embracing change is necessary, generally change is not as big or impactful as we perceive it to be. His view is that being adaptable, having good risk management tools, and being prepared are your largest allies in periods of change. I can’t think of a better way to describe our current positioning as it relates to our clients money. As always, we are incredibly grateful that you have put your trust in us to help manage these important decisions. Please feel free to reach out if you want to discuss any of these concepts further.

 

“Predicting what the world will look like fifty years from now is impossible. But predicting that people will still respond to greed, fear, opportunity, exploitation, risk, uncertainty, tribal affiliations, and social persuasion in the same way is a bet I’d take.”

― Morgan Housel, Same as Ever: A Guide to What Never Changes

 

By Mike Van Berkel