The year 2020 is turning out to be a year to remember and to forget all at once. If the events of the past nine months (let alone the last four years) had been scripted, a Hollywood movie producer might have rejected it as too far fetched, and yet here we are. Suffice it to say we have never seen a president/candidate placed in quarantine with one month remaining in a US presidential election, let alone one who bombastically ridiculed the virus from which he now suffers. The magnitude of economic, social and political shocks should reasonably see markets markedly lower. Despite all this, however, markets have managed to recoup much of their losses, albeit led by a smaller group of technology stocks.

Common sense dictates that a rational investor be wary of these conditions - so why then are markets so resilient? As discussed in previous commentaries, it is the willingness of governments to put a floor under markets with low rates and endless spending. The inherent problem with this is the risk taking it encourages and the inevitable bubble this creates. Signals of irrational exuberance continue to emerge. During the third quarter, both Apple and Tesla split their stocks. Splitting a stock creates no real value just as cutting a slice of pizza in two does not magically result in more pizza! It does create an opportunity for smaller retail investors to participate in the momentum game. Following this announcement, Apple's stock climbed 40% higher. Subsequent to the split, the stock has fallen as much as 25%. Clearly the casino is open.

There is no doubt that Apple is a world class brand and company, but everything should and does have a price. It is worth noting though that Apple earned $82bn in pre-tax profit in 2015. In 2019 it earned $76bn and is expected to earn roughly the same this year as its profit margins steadily decline. Hardly the cause for celebration on the scale we have seen in the last year or so. We present these facts not to disparage Apple as there are more egregious examples. This is simply to show how carried away some areas of the market have become and how fundamentals have been disregarded, for now.

The Canadian market has not been immune to this excitement with the financial sector lagging the likes of Shopify. That being said, in a world with ultra low interest rates and sky-high valuations, compounding dividends will be an extremely important component of an investor's return over the next number of years. The Canadian banks may not feel as exciting as some of these high-flying momentum names, but with stable dividends that grow over time, and valuations that are in the lower end of their historical range, a prudent investor would do well to own those shares.

Over the remainder of the year, volatility is likely to rear its head. We saw cracks in the “momentum trade” in September. The feared second wave of Covid19 is upon us, although it should be better managed this time around, at least in Canada, where there is more consensus among politicians on what measures will work, and who we need to protect. The major wild card of course is the US election. The best outcome in our view would be a clear winner and not a disputed result.

History has taught us that these short-term events rarely produce the result some fear. In 2008, the Democrats won a majority across the board and many feared health care stocks would be decimated. In the end, Obamacare ended up being a net positive for most healthcare stocks as Medicare expanded. In 2016 there was panic the night Trump was elected but of course since then markets have soared in large part thanks to tax cuts. Despite this short-term uncertainty and pockets of high valuations, we still see many areas of the market that are attractive from a long-term perspective. We continue to monitor our watchlist for these opportunities, and, as always, scrutinize our current portfolio for risks to our long-term thesis on individual companies.

We wish you and your families well as we enter the winter months, and welcome any comments or questions you may have.