Gordon Reid, president and CEO, Goodreid Investment Counsel

FOCUS: U.S. equities 

MARKET OUTLOOK:

After a strong start to the third quarter, financial markets wilted in the final couple of months. Paradoxically, the reason rests largely with the strength and resilience of North American economies, leading to the adoption of a “higher for longer” stance as it pertains to interest rates. The rapid rise of bond yields in August and September scared off bullish equity investors and the bears took firm hold. It’s counterintuitive to be deeply concerned about a stronger economy than had been expected, but this is one of those times when “good news is bad news.” We expect that as the equity market digests the new reality it will realize that an economy can live with mid-single-digit interest rates, as evidenced by decades of experience in the modern era.

Although North American economies continue to hold up well in the face of higher interest rates, the consumer seems to be running out of steam. The massive stimulus provided during and immediately after the pandemic has carried individuals since early 2020, but most U.S. households have now dipped below the savings rate at the time the pandemic hit. Goodreid believes the U.S. economy is trending toward a slowdown and possibly a recession. The good news is that not all recessions are alike. Other parts of the economy are in better shape. The trillions of dollars fiscal authorities have earmarked for infrastructure, computer chip development and inflation reduction efforts have largely yet to be spent. U.S. construction spending has spiked recently, and it’s just the beginning. So, while an economic slowdown is our likely path, it will be felt most on Main Street and affect financial markets to a lesser degree.

• Sign up for the Market Call Top Picks newsletter at bnnbloomberg.ca/subscribe
• Listen to the Market Call podcast on iHeart, or wherever you get your podcasts

TOP PICKS:

Booking Holdings (BKNG NASD)

Latest Purchase September 2023 at $3086

Booking is uniquely positioned to capture its share of the travel dollars post-COVID-19. Its connected trip strategy will allow for a surge in cross-selling. Its European and Asian strength in hotel booking is showing its teeth as this fragmented market is perfectly suited to BKNG’s online model. Goodreid expects $140/share in earnings per share (EPS) in 2023, growing to north of $160 in 2024.

Chubb (CB NYSE)

Latest Purchase September 2023 at $213

Chubb is the largest Property and Casualty insurer in the world. Insurers make money in two ways, from the underwriting business which sports margins of over 10 per cent, and in CB’s case, its $127 billion investment book of mainly bonds that benefit from higher rates. With an average term of about five years, the benefits of rolling maturities will be evident.

Dana (DAN NYSE)

Latest Purchase September 2023 at $16

Dana is an auto parts supplier with a strong presence in the nascent EV revolution. Along with most auto supply companies it is weathering the current UAW strike. Buying on weakness during past labour disruptions has proven to be a successful investment strategy.