Ryan Bushell

The Canadian benchmark now sits just a hair below +17.0% year-to-date and +27.1% year-over year. Our portfolios have nearly kept pace net of fees, and our historical performance record indicates that we capture approximately 70% of the upside on average, so we are well ahead of schedule.

Following the lofty returns experienced over the last 12 months we are being asked frequently about our views on the potential for a significant market correction so we thought we would share our thoughts in this forum. We are reminded of an old basketball adage that may apply to the current situation: “two things are undefeated… father time and gravity”. The market certainly does not go up in a straight line forever so there will be a correction at some point, that much is true. We do not disagree with those pointing to stretched valuations and a market dividend yield that has dipped below the 3% level as storm clouds on the horizon, but we have some contrary factors that we would point to as reasons this run could continue. First the S&P 500 has posted a 4 year annualized total return of 20% per year; this is more than double that of the TSX. Canada is a late-cyclical market and this could be our time to shine, a view supported by the significant outperformance of the Canadian market year-to-date. Second, 10-year government bond yields are headed back to the lows in both Canada and the United States, leaving investors seeking total return with few alternatives to equities in the investment marketplace. This was the scenario we envisioned when we were begging people to buy equities in 2009, 2010 and especially in 2011, when the market provided a bonus buying opportunity for those that missed the initial run up in the aftermath of the financial crisis. Finally the market has had two significant corrections in the last seven years, one of which was the deepest since 1929. Markets tend to perform stronger than expected following such events, in large part because of the rampant pessimism that gets embedded in the psyche of investors that experienced a recently traumatic market event.

Bottom line we have no idea when the next market correction will come, and cash returns do not compensate one to sit on the sidelines. We will remain invested knowing that we get paid a 3-4% yield to be invested regardless of the direction of the market, and also knowing that the fundamentals of the companies we own are solid and will sustain them well beyond the current market cycle.


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