Report Updates

We have posted report updates on TMX Group (X) and Northland Power (NPI). TMX is a dominant player in Canada and continues to grow its operations internationally, and NPI is a stable renewable energy company that delivers on solid adjusted EBITDA and free cash flow growth. One company is benefitting from its exposure to the energy markets and we believe that its valuation prospects are becoming quite interesting, and the other has shown good margin expansion and consistency in achieving its targets.

Read the latest updates by logging in here!

Market Update
Markets have fallen sharply over the past couple of weeks and most investors are pointing to continued hawkishness from the Fed, higher than expected inflation readings, and slowing economic growth as the primary causes. The latest inflation reading came in at 8.3% for the US, which demonstrated a slowing of inflation from the prior read. Tough data points from China are sparking fear of global implications, and bond yields are stabilizing near elevated levels. In this market update, we talk about the high levels of volatility and how investors can put this latest decline into context.

This is What Volatility Feels Like
Throughout its history, the gyrations of the stock market are precisely why some individuals refer to the markets as ‘risky’, while others refer to it as a ‘calculated-risk opportunity’. The stock market’s volatility is what enables it to re-rate and revalue itself in the face of external factors, such as rising interest rates, geopolitical risks, and economic growth. This volatility has historically presented investors with profit-making opportunities, while also causing internal pressure on one’s psyche. If it feels bad right now, it’s because it is bad, but tough times don’t last forever.

Volatility is extremely high right now and the Volatility Index (VIX) is running near a level that it does not frequent often. We have highlighted below in red where the current VIX levels are compared to its ~30-year history.

The S&P 500 has suffered a close to 18% decline since late 2021, and this marks one of the worst declines in the market’s history. Dating back to 1950, the S&P 500 has only declined by 18% or more 15 times. This means that in over 70 years, the market has only faced a worse decline 15 times. Roughly one every five years. Of those 15 instances, seven are only a few percentages off from today’s decline, whereas the remaining eight faced a much steeper decline. That’s not bad considering this data alone suggests a 50/50 chance of this being very close to the bottom.

Source: Y Charts

We feel that if an investor is losing sleep, there is likely too much risk in a certain asset class or sector. An important piece of building an investment portfolio is staying properly diversified across sectors, and not having a highly concentrated allocation towards a single stock or name. As the market tends to rotate between its different sectors and factors (growth to value or tech to energy), it is also vital to rebalance here because outperformance does not last forever, and eventually, the market tends to rotate to keep everything in equilibrium.

Relativity of Time
These past several months have been challenging for most investors, and in these times of negative returns, it can feel as though it is dragging on forever. Time is relative, and to put this into perspective placing one’s hand on a stove for a minute will feel like an hour, whereas going on one’s phone for an hour will feel like one minute. This is the theory of relativity, and it states that the rate at which time passes by is relative to the frame of reference.

From just prior to the pandemic crash of 2020 to the beginning of the most recent market decline has marked close to 700 days. The most recent market decline that kicked off in early 2022 has totaled roughly 125 days. It may feel as though the market has been in a downtrend forever, but in reality, the incline from the pandemic was almost six times longer.

It is easy to become agitated or antsy as an investment portfolio declines in value, but one of the most important lessons is to step back and assess why one is making a change in a portfolio, if it is appropriate, or if it is reactionary. Fidelity conducted a study on its client’s portfolios between 2003 and 2013, and it found that the best performing portfolios were those where the investors forgot that they had an account with Fidelity. To further solidify this point, Warren Buffett once said that ‘the stock market is a device for transferring money from the impatient to the patient’. Volatility is the name of the game for taking calculated risk opportunities and buying at low levels, but when the downside volatility reduces portfolio values, the key is to treat it like a sandstorm and not move, waiting until the dust settles and it passes over.

Concluding Thoughts
There is a chance that the markets can continue to decline and that things can get worse, but what we know is that the markets have faced 15 declines over the past 70 years that are worse than today's, and yet the market made an all-time high just 125 days ago. Time may feel as if it’s dragging on forever with the relentlessness of the market, and it may feel like it will never end, but eventually, it will, and it always has historically. Our view is to zoom out and take a look at the larger picture and focus on the fundamentals.

Model Portfolio Changes

Income Model Portfolio

Sell full Magellan Aerospace Corp (MAL) Position
Trade Rationale - MAL has not displayed the recovery that we were expecting. Management recently cut the dividend by 24% and from experience, the first cut is generally not the last. The reduced dividend is now also below the portfolio's target yield of 4%. We believe we can put the cash raised from the sale to better use.

Best wishes for your investing!