After years of money printing and obscene valuations, the chickens have finally come home to roost. Central banks across the world have begun the process of raising rates and reversing “Quantitative Easing” (money printing) in an effort to stifle rampant inflation. So called “covid stocks” such as Peloton and Zoom have lost all their pandemic gains. Private equity is on the cusp of major write-downs in their asset values while recent IPO’s, dubbed unicorns for their unbelievable growth and value, proved to be unbelievable. And then of course there is the fall of Bitcoin which is leading to the collapse of crypto-exposed hedge funds and lenders.

Year to date, the S&P500 is off 20% with technology shares bearing the worst of it. The TSX has fared better but still down 10% over the same period. Continued strength in energy shares was more than offset by Canadian technology giant Shopify, which is suffering its own Covid hangover, falling 80% from its peak. Shopify’s business opportunity is compelling; however, its current valuation still more than discounts that while ignoring both execution risk as well as competition from giants like Amazon. Overseas, International shares fell 19% due in large part to the ongoing conflict in Ukraine, and Covid lockdowns in China. While our portfolios have not gone unscathed by this broad-based selloff, they have fared far better than the market overall as we avoided overheated areas of the market in anticipation of an eventual return to fundamentals.

In the near term, concerns around high inflation and rising rates will mean all assets are vulnerable to further market sell-offs. We expect the focus of the selling to continue to be in speculative areas which still trade at stretched valuations. Challenges around supply chain shocks (Ukraine, China Covid lockdowns) will persist and create problems for inflation and the economy. The market appears to already be pricing in a significant economic slowdown, although the timing, depth, and duration are difficult to determine. An offset to some of this is pent-up demand by consumers to travel in a post-covid world, although labor shortages are creating a headache for an industry in need of a resurgence.

Taking a longer view, we are keeping an eye out for opportunities to buy high quality companies which have sold off due to short term concerns. A durable theme, which we expect to persist, is the “nationalization” of supply chains. This will create opportunities for some companies and industries. Health care delivery and technology desperately needs investment, and this will also result in winners and losers. Importantly, we are positioning portfolios defensively for the current environment while identifying long-term themes for growth.

Recessions are a normal, and unfortunately, important part of the economic cycle. They “let the steam out” before economies get too overheated. It is always difficult to predict when a recession can or will happen. Our goal is to ensure the portfolio is well positioned to weather difficult times while participating in long term growth. Investing requires humility – acceptance of what you can and can’t control -- and timing markets is simply not a game we believe sets investors up for long term success.

As Warren Buffet has often said, he makes no attempt to forecast the “market” – rather focus on finding companies with attractive prospects and valuations. For us this means owning companies with reliable cash-flows in industries such as telecom, consumer staples and healthcare. These types of companies often have the added benefit of paying dividends, which serve to smooth out any downdrafts in prices. Dividends are an important and tangible component of a portfolio’s total return, and we suspect will be even more so over the next year or so as markets remain challenged.

As always, we appreciate the trust you have placed in us. We wish you a very enjoyable summer and look forward to discussing any questions you may have.