April 2017

There are no accurate models to predict when an economy will head into a recession which means lower corporate profits and softer stock market performance. The best guess we have is when the yield curve inverts, i.e. shorter term bond yields get higher than longer maturities. That makes intuitive sense for it indicates that the cost of doing something now becomes greater than the profits in investing longer term. Based on that, we are no where near any kind of a sustained loss of growth. The economy has been growing quite tepidly to begin with. So here we are eight years after the great recession with no signs of another one on the horizon. This is quite unusual. My best guess is that since there is only a finite amount of economic activity determined not by rates or politics but by population growth and spending, slower the recovery longer it will last. This could go on for a lot longer barring a surprising event such as war or a financial crisis like the one we witnessed last time. And those are even more unpredictable.

Given this uncertainty and a US president who has made an art of becoming unpredictable, there is not much point in making changes in your investment portfolio. Yet, most experts feel the market is overvalued now. The key is what do they recommend as a strategy? Their recommendations are to focus on dividend paying stocks like Telecom and utilities. That has been our strategy now for over eight years along with a few bets on technology and banks. For the income component we still love preferred shares. I have found most people have got it wrong about Canadian banks for many decades when they try to time entry or exit. The best strategy has been to buy and hold. Why? We are hostage to this oligopoly with no one with guts or enough reason to fool with the system. This is not the US.

We could be tempted to sell our positions and stay in cash with no return on our money and wait for good times to return. This has never worked except for a few very lucky people. So we made little changes last quarter and did quite well compared to the general markets.