Gordon Reid, president and CEO, Goodreid Investment Counsel

FOCUS: U.S. equities

MARKET OUTLOOK:

The whole world is on edge and in a state of disbelief as the horrific accounts and images come out of Ukraine. Inflation continues to be a headline item as it becomes evident that the residual effects of supply chain disruptions and decades of under investment in our workforce are going to be more than tailings. COVID just will not go away and continues to disrupt life, the economy, and markets. And to top off the list of worries the market is digesting, central bankers are becoming more hawkish and signaling that interest rates are going higher, faster.

The resulting market action in the first quarter was volatile with a capital V. From beginning to end, the S&P 500 index was down 4.9 per cent. But from the beginning of January to the start of March, the index fell 13 per cent, before recovering 11 per cent into the close of the quarter.

There have only been 11 times since the Second World War that witnessed an intra quarterly decline and advance of the equity market of greater than 10 per cent. The Bespoke Investment Group provided some interesting analysis of likely future market action by analyzing the historical record. Notably, one quarter later, the S&P 500 index was higher 10 out of 11 times and a year later, it was higher all 11 times.

An impending recession because of an inversion of the yield curve is the talk of the day, but don’t get too locked into that theory. Recessions are always predated by inverted yield curves, but not all inversions have led to recessions.

Also, consider the lag. Markets are positive an average of 19 months after an inversion first appears. The other critical consideration is the unprecedented nature of our times. Monetary and fiscal policy have been incredibly accommodative, the pandemic related lock-up has led to an absolute flood of demand and the behaviour of the workforce has created dislocations like we have never seen.

All these factors lead us to continue our cautious approach. We will utilize a barbell strategy, emphasize quality and reasonable valuations.

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TOP PICKS:

General Motors (GM NYSE)

Latest Purchase April 2022 @ $45

GM has shrunk its cost base to allow B/E @ 10MM N/A vehicles sales – normal run rate 17MM, but sales remain depressed, solely on the back of supply issues. Demand is strong and they will spend $27 billion on electric vehicles by 2025 resulting in 40 per cent of offerings being electric. The future is bright, and GM is trading very inexpensively, but for now the stock is in the doghouse. Be patient.

Goodyear Tire (GT NASDAQ)

Latest Purchase April 2022 @ $15

After completing its acquisition of Cooper Tire, this global tire manufacturer is set up for the resumption of OEM demand, a strong replacement cycle and increased profitability from supplying electric vehicle production. At its current share price, GT is a compelling value. Look for $2.50 per share in earnings in 2022, and $3 plus in 2023.

Lowe’s (LOW NYSE)

Latest Purchase April 2022 @ $203

Worries over a stalled expansion and possible recession because of aggressive Fed tightening have led the home improvement space lower. However, analysis shows that bull markets continue an average of 19 months after the first tightening. At 15 times the current year’s earnings we like the risk/reward of this issue.

Chubb (CB NYSE)

• Then: $160.92
• Now: $212.63
• Return: 32.13%
• Total Return: 34.12%

Dycom (DY NYSE)

• Then: $93.32
• Now: $91.55
• Return:  -1.87%
• Total Return: -1.87%

Freeport McMorRan (FCX NYSE)

• Then: $33.73
• Now: $48.39
• Return: 43.46%
• Total Return: 44.57%

Total Return Average: 25.60%