For the markets, summer vacation was in full effect the first couple months of the third quarter. After a poor start to the year, bargain hunters were out and some dangerous themes resurfaced. Meme stocks (remember Game Stop, AMC, and Bed, Bath & Beyond?) rebounded after cratering earlier in the year. Money flowed back into still highly valued tech stocks. Then September came and it was time to go back to school – for the kids (thankfully!) and the markets. The spike in these risky assets reversed. Fears of runaway inflation, and central banks aggressive interest rate response, has led many to fear our first true recession in over a decade.

In Canada, the summer gains for the TSX were lost in September which ended the quarter down slightly, adding to the disappointing returns in 2022. After a buoyant July, investors moved into safer areas of the market such as consumer staples while avoiding technology and real estate which have come under scrutiny given rising rates and weaker home prices. Local champion, Shopify, looked to recover some of its year-to-date losses, rebounding 10% in July only to subsequently fall 17%.

In the US, the market followed the same path during the second quarter, selling off in September. The S&P did manage to scratch out a small gain although not enough to put a dent in the poor returns for the year. Investors stubbornly returned to expensive names such as Amazon and Tesla despite likely pressure on their businesses from an economic downturn. We continue to believe that these over valued areas of the market will be weak, and investors will be well served to ensure they are paying a fair price for the investments.

Outside North America, the picture is certainly murky to say the least, and market performance reflects this. Any détente in Ukraine would be welcome but shouldn’t be counted on. China continues to pursue a stubbornly bizarre policy path in its battle with Covid. While most of the world has largely moved on, the worlds 2nd largest economy continues to see rolling lockdowns. All this has led to abysmal returns globally. This has also led to attractive valuations for many companies that have been unduly punished. Many European companies with global operations have sold off despite very similar profiles to counterparts in the US. This is just one example of an opportunity for patient investors.

A recession is not certain but seems like a reasonable outcome given all the aforementioned challenges. Pent-up demand to get out and travel/socialize post Covid will offset some of this weakness. This said, markets have traded much lower with the MSCI World down 18% year to date. An argument can be made that many of the issues being faced have been priced in and we are seeing attractive valuations in certain areas. We will however be watching for signs of cooling inflation in months ahead. If it remains stubbornly persistent, rates will continue to climb higher which will continue to dampen equity valuations.

Individual company fundamentals matter more now than ever. We believe it is in periods like this that our style serves us extremely well. We reiterate that our focus continues to be more defensive with an emphasis on globally diverse companies, predictable cash flows and healthy dividends. While no country, sector or company can completely avoid the economic challenges, avoiding those with the highest valuations or least predictable cash flows will help to weather any economic storms this Fall and beyond.