Gordon Reid, president and chief executive officer, Goodreid Investment Counsel

FOCUS: U.S. equities

MARKET OUTLOOK:

Good riddance to September 2022, the worst September performance in U.S. equity markets since 2008. The quarter was a wild ride, recording at one point a 14 per cent advance in the S&P 500 index, only to close in negative territory, the first time this has happened since 1931!

It all points to an extremely conflicted investor who is worried about the U.S. Federal Reserve finally getting religion and taking on inflation and asset bubbles that had developed in both the equity market and the real estate market. It appears that its actions are being noted and acted upon, see bond rates! Markets have repriced and now we wait to see if the Fed’s actions will also have an unintended consequence (such as a financial accident that the Bank of England was concerned about). The other worry of course is that it will tighten too much, driving the economy into a deep recession. Its aim is a terminal rate of 4-4.5 per cent, and if inflation responds by dropping below that level (yielding positive real rates), the Fed may pause. This would give the lagging portions of the economy, most notably the job market, time to respond to the tightening.

We see the market sitting on a fulcrum. Will the market go to new yearly lows based on disappointing earnings, stubborn inflation and a continuation of a strong labour picture? Or will the labour market show some weakness? Will core inflation come off the boil and corporate earnings hold up better than expected? Regardless of the road we travel, either through tough economic times or a mild and short-duration downturn, the destination is the same; a new economic cycle that will carry markets higher. 

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TOP PICKS:

Elevance Health (ELV NYSE)

Latest Purchase August 2022 at $486

Elevance, formerly named Anthem, is a managed care operator with 45 million members. With the tailwind of an aging population and a desperate need to provide health insurance solutions, ELV will be in the mix. Health care has proven to be a safe haven during this bear market. Goodreid expects earnings of $33 per share in 2023, yielding a P/E of just over 14x and a free cash flow yield of six per cent.

General Motors (GM NYSE)

Latest Purchase August 2022 at $39

GM gave investors a significant signal recently by reinstating its dividend. Worries about a deep recession have capped this issue’s ability to be priced based on a normalized operating environment. When the skies clear GM’s stock price will begin to reflect the vast promise of a reinvented auto industry.

Morgan Stanley (MS NYSE)

Latest Purchase August 2022 at $88

Wealth management now makes up more than half of its business, a fact that does not appear to be priced into the stock quotation. The consistent and abundant cash generation of its new model has allowed it to buy back large amounts of its stock, which when combined with its juicy dividend, yields close to a 10 per cent return to investors.