MARKET OUTLOOK:
Broad equity indices managed to eke out marginal gains in the quarter as the spectre of elevated inflation combined with the expectation of tapering of bond purchases by central banks kept a lid on markets. Sustainable upside is not likely until there is more clarity regarding the persistency of higher inflation and more importantly, the ability of corporations to maintain profit margins and meet earnings expectations for the balance of the year and next year.

Interestingly, the U.S. Fed’s 2023 projections for real GDP growth of 2.5 per cent, core PCE inflation of 2.2 per cent and the unemployment rate at 3.5 per cent is not too different from the economic conditions that prevailed pre-pandemic: Q4/19 real GDP of 2.1 per cent, core PCE inflation of 1.9 per cent and February 2020 unemployment rate of 3.5 per cent. Both the “growth and inflation spikes” are projected to be temporary and the health crisis has not changed the longer-term trends that were in place prior to the pandemic. Financial markets are not accepting this at face value and are also questioning the impact of the massive amount of liquidity that has been injected into the financial system by central banks through quantitative easing since March 2020. 

Central bank policy around the world remains very accommodative and interest rates near zero.  Notwithstanding inflationary concerns, the U.S. 10-Year Treasury Bond yield at 1.57 per cent remains below the peak of 1.73 per cent in March when inflation fears were first stoked. The 10-Year Breakeven Inflation Rate, an indication of what market participants expect inflation to be in the next 10 years, on average, is 2.50 per cent and has risen this year but is still at a manageable level.

The pandemic seems to have accelerated the pace of productivity growth, as companies have embraced technology as the best and fastest way to boost productivity and improve profit margins. Business spending on automation and software in the U.S. was up over 7 per cent in 2020. The adoption of automation and technological change is also inherently a disinflationary trend and could largely offset any upward wage pressures. 

Once again, we highlight corporate profit growth as the primary driver of price appreciation for stocks.  The price gains so far this year have been due to earnings growth as the current price-to-earnings multiple for the S&P/TSX Index and S&P 500 Index on 2021 consensus earnings is lower than it was at the beginning of the year. 2021 consensus earnings for S&P/TSX companies have been revised up 24 per cent and up 20 per cent for the S&P 500 since the start of the year and has propelled double-digit returns year-to-date. Earnings growth in 2022 and 2023 is expected to continue albeit slow to a single-digit rate. Dividend growth and share buybacks have not kept pace with profit growth so there should be some catch-up which is also supportive for stock prices.


TOP PICKS:

Abbott Labs (ABT NYSE) 
Last bought $118.50 in September 2021
Abbott is a diversified global healthcare company operating in four segments: Diagnostics, Established Pharmaceuticals, Medical Devices, and Nutrition. Its products are sold in over 160 countries with about 60 per cent of sales from developed markets and 40 per cent of sales from emerging markets. ABT has increased its dividend for 49 consecutive years and offers a dividend yield of 1.5 per cent.

Envista (NVST NYSE) 
Last bought $40.20 in October 2021
Envista is a leading dental products company, providing products that are used to diagnose, treat, and prevent disease and ailments of the teeth, gums and supporting bone. It has a global presence with North America representing 48 per cent of revenues, Western European Union 23 per cent, Emerging Markets 22 per cent, and Rest of World 7 per cent. Demand for dental products and services is driven by favourable demographics, emerging middle class in developing countries and new technologies.

Linde plc (LIN NYSE) 
Last bought $300 in September 2021
LIN is the largest industrial gas company worldwide, serving a diverse group of industries and geographies. Linde is positioned to benefit from an improving global economy and its leading positions in attractive secular growth end markets including healthcare, electronics, and clean energy. Linde provides a dividend yield of 1.4 per cent.

PAST PICKS: October 14, 2020

Alphabet (GOOGL NASD)

• Then: $1,563.44
• Now: $2,746.23
• Return: 76%
• Total Return: 76%

Fortis (FTS TSX) 

• Then: $54.00
• Now: $55.94
• Return: 4%
• Total Return: 7%

Royal Bank of Canada (RY TSX)

• Then: $97.08
• Now: $128.30
• Return: 32%
• Total Return: 37%

Total Return Average: 40%