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Points in Time, Q3 2023

Are we in a mild recession now? Maybe, though it’s hard to tell just yet. Whichever direction markets may move over the coming few quarters, the unpredictable nature of the post-pandemic economy is likely to become more predictable. And that’s a good thing from an investment point of view.

In this commentary:

September lives up to its reputation | Canada | U.S. | International | Fixed Income

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September lives up to its reputation

Scott Blair, CFA
Chief Investment Officer

Investors often think of October as the worst month for stock market returns, primarily due to two separate Black Mondays. On October 19, 1987, the S&P 500 fell 20.5%. Decades before, on October 28, 1929, the S&P 500 fell almost 13%, and another 10% the following day. Despite these two high-profile selloffs, October has actually been a positive month for the markets as defined by the S&P 500.

In fact, September has proven to be the worst month of the year for stocks. February and May are also slightly negative, but September by far lags the other months of the year. Which makes one wonder why the phrase “sell in May and go away” is so popular. Perhaps nothing pertinent rhymes with September.

Higher yields

September lived up to its track record this year as it was a down month for global stock markets, though it didn’t drag returns down too far. Overall, Q3 returns were negative but not significantly – the S&P/TSX Total Return Composite was down 2.2% while the S&P 500 fell 1.1% (in Canadian dollar terms) – as positive returns earlier in the quarter helped. The bond market, on the other hand, had a difficult Q3 with the 10-Year Canada benchmark bond yields rising to levels we haven’t seen in over fifteen years (Figure 1). 

Figure 1: CAD bond yields over 30 years
CAD Bond Yields Over 30 Years

Source: FactSet

The move higher in bond yields was caused by economic numbers for Canada released in September that showed a significant increase in inflation (CPI), from 3.3% in July to 3.9% in August. In light of these numbers, investors have come to firmly believe that central banks will keep interest rates elevated for longer than originally expected. Although this doesn’t necessarily mean that rates will significantly rise from here, it does mean that rates cuts could be a year away.  


Economy gearing down

The Canadian economy contracted by 0.2% in Q2. Consensus forecasts from economists for the next three quarters (including just completed Q3) are for slight growth, but some think we’re already in a mild recession. The truth is that most Canadians won’t notice the difference between an economy that’s growing or shrinking at a very low rate (such as +/-0.2%), but the point is that the economy is slowing. In fact, economic growth has been slowing globally as nations have been using the same playbook: fight high inflation brought on by pandemic spending with higher rates at a time when pandemic savings are shrinking.


Looking ahead

What’s on the horizon? One could be forgiven for looking back fondly on our boring pre-pandemic economy. Economic growth and inflation were relatively predictable (2%ish for both). By comparison, our post-pandemic economy has been unpredictable given all the rapid changes in rates, for example. Yet while the past few years have been full of questions, the path forward does appear to be getting a little clearer.

Slower growth, lower inflation, and higher unemployment (from extremely low levels) are the desired outcomes of this playbook. Getting out of this situation with a soft landing or mild recession would be a success for central banks. It looks as though they may pull it off, but it’s still too early to declare victory in that regard.

From a stock market perspective, if the economic slowdown is relatively mild then an earnings recession is unlikely, as is a severe market correction. Regardless, in a slowdown environment, stock selection and diversification become very important. From a fixed income perspective, the past few years have been difficult. However, with yields hitting levels we haven’t seen in 15 years, future returns are looking very attractive and offer a good counterbalance to equities as the economy slows down.

Sources: FactSet, TD Securities, Yardeni Research Inc.


Gil Lamothe, CFA
Senior Portfolio Manager, Canadian Equities


The third quarter of 2023 has had a familiar ring to it, in that we’ve seen oil and energy stocks moving significantly higher while the recently strong technology sector has been lagging. We also saw this behavior through most of 2022, before reversing abruptly into the first half of 2023. In this quarter, the Canadian energy sector is up 10.3%, while the technology sector is down 7.5.%. Strength in energy continues to be driven by the low levels of supply in the face of steady demand, with little expected relief given OPEC cutbacks and the lack of Russian supplies.

Canadian technology stocks cover a wide range of business environments. There’s a sense that growth may slow for longer than expected, as indications are that interest rates may stay persistently high into 2025. Companies like Shopify, for example, are sensitive to consumer behavior and Canadian retailers have been reporting a slowing of demand for discretionary goods. This has begun impacting the earnings for these vendors, and the consumer discretionary sector was down 7.1% in the quarter. It seems as though we’re beginning to see the effects of the Bank of Canada’s (BoC) tighter interest rate policy on consumers.


The increasing interest rates have also negatively affected the prices of stocks in the communications, pipelines and utilities sectors. These companies make large, long-term capital investments, designed to pay off over many years. The debt burdens incurred to do this, in a high-rate environment, can impair the returns on these capital investments, making them less attractive. The companies have pricing mechanisms to allow for this, however, these can take time to be fully implemented.

These sectors are among those in which income investors look for consistent and growing dividends. The attractiveness of higher available yields in short-term, interest-paying investments can lure investors out of these dividend paying equities. This is somewhat of a false economy, as these investors will forego any dividend growth and must re-invest the funds, often at much lower rates, once the interest paying investment matures. Experience has taught us that when these interest sensitive stocks come under this sort of pressure, it’s a buying opportunity.


Canadian pipeline stocks have been trailing energy producers. This is no great surprise as they’re very much a utility for the energy sector and, as such, are generally interest-rate sensitive. Their existing pipelines are fully utilized, so further growth will only come with more investment in very difficult and expensive-to-build pipelines. TC Energy (TRP) is constructing a pipeline, the Coastal GasLink project, to bring natural gas from western Canada to a liquified natural gas plant at Kitimat, along the B.C. coast (Figure 2).

Figure 2: Costal GasLink pipeline project

Costal GasLink Pipeline Project

Source: Coastal GasLink Pipeline Ltd.

Construction costs have more than doubled since the project began in 2018, forcing the company to partially sell some assets to provide funding. The project is now 90% complete and is expected to begin operations by early 2024, adding approximately $0.15 per share to TC Energy’s earnings. We’ve added to TC Energy now that this additional funding has been secured.

We’ve also taken advantage of the pullback in technology stocks to add to our position in Open Text (OTEX). The company’s integration of its large Micro Focus acquisition, announced last year, seems to be on track and should reflect positively in the company’s cash flows in 2024.

Source: Bloomberg


Q3 2023 Dividend Performance Summary

Canadian Dividend Portfolio
Number of companies in the equity portfolio 31 
Number of companies that declared an increased dividend 24 
% of companies that declared an increased dividend 77.4% 
Weighted average of dividend increase 3.8% 
Consumer Price Index increase (YoY*) 4.0% 
Equity portfolio dividend yield** 4.9% 
S&P/TSX dividend yield 3.4% 


Top 10 Dividend Growers

* Estimate from Statistics Canada, August 31, 2023
** The dividend yield is based on the Leon Frazer Canadian Dividend Fund which includes a target weight for cash
Source: CWB Wealth, September 30, 2023


Liliana Tzvetkova, CFA
Co-Head of U.S. Equities & Portfolio Manager

Saket Mundra, CFA, MBA
Co-Head of U.S. Equities & Portfolio Manager


After a strong first half of 2023, the S&P 500 showed relatively weak performance, declining by 3% in U.S. dollar terms in the third quarter. There were some notable bright spots, with the energy sector gaining 12% and communication services rising by 3%. However, all other sectors experienced losses due to renewed concerns about persistent inflation and the possibility of “higher for longer” interest rates.
The yield on the U.S. government 10-year bond reached 4.6%, its highest level since 2007. This exerted downward pressure on long-term asset prices. Consequently, interest rate-sensitive sectors such as real estate and utilities were the poorest performing sectors, both declining by 9%.

There’s concern in the market about the potential for further increases in oil prices. Supply has been an issue for various reasons, such as the war in Ukraine and a lack of industry investment. Although higher oil prices would be positive for the energy sector, it’s not clear that prices will continue to rise. Demand tends to fall when economies slow, and we do appear to be entering a period of slower growth. It’s important to emphasize the importance of maintaining a long-term perspective when it comes to commodities.


As is often the case, the market is overly fixated on short-term challenges, creating compelling investment opportunities. Two such opportunities may be developing among our existing holdings: Dollar Tree and Dollar General.

Dollar Tree and Dollar General are U.S.-based retailers that primarily sell items priced at less than $10. Their product offerings include consumables (e.g., food and beverages, health and beauty, and household cleaning supplies) and discretionary items (e.g., toys, gifts, houseware, and party supplies).

Consumables typically have lower profit margins, but dollar store companies use them to attract customers into their stores who then purchase higher-margin discretionary items. Dollar Tree and Dollar General are competitors that have unique business models, often serving smaller, low-density areas that major retailers overlook. Additionally, their ability to purchase large volumes of low-priced products provides them with substantial bargaining power over suppliers.

These two firms have outperformed the S&P 500 for much of the past five years. However, the market is now concerned about their slowing growth, market share losses to other major retailers like Wal-Mart, and declining profit margins. Their stocks have fallen by 25% and 57%, respectively, this year, erasing their outperformance over the past five years (Figure 3).

Figure 3: Dollar Tree and Dollar General returns compared with S&P 500
Dollar Tree and Dollar General returns compared to S&P 500 (indexed to 100)

Source: FactSet

Upon closer examination, however, there are reasons to believe that Dollar Tree and Dollar General will overcome current challenges reflected in their declining stock prices. We interpret some of these challenges as a return to normal spending patterns as the impact of pandemic stimulus measures wane and inflation stays high. We have observed a shift over the last several months back to lower-margin consumables by many customers of these stores, following a period of spending on higher-margin discretionary items. Yet we believe Dollar Tree and Dollar General can navigate through these challenges based on their strong business models.



Over the past quarter, our U.S. portfolios outperformed the S&P 500. We capitalized on the market's weakness and increased our positions in Dollar Tree and Dollar General, both of which we had trimmed when the stocks were much higher. After many years of benefitting from Deere’s increasing earnings, we sold our remaining position in the firm as the agriculture cycle appears to be close to peaking. We also took some profits in our position in NVIDIA during the quarter.

Overall, we have confidence in our portfolio. It comprises numerous high-quality businesses trading at what we consider attractive prices, and we expect them to deliver favorable returns over the long term.

Sources: FactSet


Ric Palombi, CFA
Senior Portfolio Manager, International Equities and Alternative Income


In China, investors hoping for outsized stimulus, as experienced in 2008, have been disappointed. Instead, the focus has been on easing the regulatory mechanisms that help to improve the underlying health of ailing sectors. In the past several months, numerous measures have been announced. These include multiple cuts to the Required Reserve Ratio for banks, lowered downpayment requirements for first and second-time home buyers, lowered mortgage rates, reduction in borrowing rates for local governments, modest spending boosts to infrastructure programs, and boosts to agricultural subsides.

While these measures lack the big bang marketing appeal, we’re beginning to see their collective impacts in the form of improvements in the fundamental economic indicators. Recent data showed that for the first time in many months a collection of important economic indicators, such as Purchasing Managers' Index (PMI), Manufacturing PMI, and industrial profit growth, are all inflecting positively. While still early to call a bottom, it’s a good sign.


We’ve repeatedly seen that markets become extremely pessimistic in the face of uncertainty. Concerns around China’s potential growth have trickled into the luxury market. China is a key growth engine for luxury businesses. Stocks in this sub-sector underperformed materially in the last quarter, giving up their gains in the first half of the year. However, we believe that short-term market worries represent longer-term opportunities for our clients. The companies we own are some of the highest quality businesses globally, and they have immense pricing power.

For instance, our biggest weight in the sector, LVMH Group, has continuously increased the intrinsic value of the business through its superior capital allocation abilities and the strength of its business model. In our estimate, the company is currently pricing in an annual growth rate of approximately mid-single digit for the next decade, which is in line with the projections for the luxury sector.

For context, luxury demand has historically grown at double the rate of GDP growth over the last two decades, while LVMH’s key Fashion and Leather Goods segment has outgrown even that by approximately 5%.

In our opinion, the current valuation levels for LVMH imply that:

  1. Chinese growth potential has structurally been downgraded to a low single-digit range;
  2. the luxury market has lost its ability to grow ahead of GDP; or
  3. LVMH has lost its competitive edge.

We think all three of these scenarios are extremely pessimistic given LVMH’s quality and pricing power.

From a broader perspective, China is still behind some of its Asian counterparts in GDP per capita, and the addressable market for luxury goods in China is still relatively low. The rising middle class provide ample growth runway for Chinese luxury demand.

Just around five to 10 million high-net-worth individuals contribute a material portion of the luxury demand in China. The next income bucket, high-income individuals, total about 270 million. Continued growth in per-capita incomes should allow many of these people to increase their spending, thus injecting further demand into the luxury market (Figure 4).

Figure 4: Select Asian countries GDP per head as a percentage of U.S. level

Select Asian Countries GDP Per Head as A Percentage of U.S. Level 

Source: Financial Times


Earlier in the year, we reduced our weight in LVMH and Richemont to reflect their changing risk-reward profile as the stocks flirted with historical highs. Given the reverse is now true, we’re in discussions to increase these again. During the quarter we added to our holdings of Remy Cointreau, which has de-rated materially in the face of sector headwinds and is currently trading below the market value of its Cognac inventory. 

Sources: Bloomberg

Fixed Income

Malcolm Jones, MBA, CFA
Head of Fixed Income, Senior Portfolio Manager

Ric Palombi, CFA
Senior Portfolio Manager, International Equities and Alternative Income


Over the course of this quarter, we saw bond yields increase again. Figure 5 shows with the Government of Canada yield curve (yields on bonds of various maturities over the next thirty years). Longer dated bond yields rose more than shorter term bond yields.

A lot of this increase can be blamed on inflation. It has proven to be quite sticky, prompting the BoC and markets to believe that the bank rate will remain elevated for longer than originally anticipated. Rate hikes take time to work their way through the economy, and the BoC will be particularly cautious of relieving deflationary pressure too soon. Markets still believe that BoC (and other central banks) will achieve their stated target of 2% inflation, although “when” is the question.

Figure 5: Big move in yields Government of Canada yield curve
Source: Bloomberg

Investment-grade spreads (i.e., the yield difference between Government of Canada bonds and other high-quality bonds) have shown some volatility this year. But overall, there’s no definite trend in spreads. Indeed, investment-grade spreads have actually narrowed slightly this year. We could easily argue that spreads are effectively unchanged. Spreads are still leaning to the higher side versus their historical average, but certainly not excessively so. This again supports our argument that we may see a slowdown or mild recession, but a significant economic pullback is unlikely.

We see a similar story in high-yield bonds. While a particular company may face distress and see its particular spread widen significantly, there is not the broad-based widening in these bonds that signals a substantial recession.


We recently saw a somewhat surprising upwards move in longer-term debt. This can be interpreted as an upwards shift in long-term inflation expectations. However, recent surveys specifically targeting these expectations continue to show a trend to 2%. A better interpretation would be that there’s a shift in sentiment in the premium in longer-term yields over inflation. Over a long history, this premium tends to be around 2.5%, which would suggest a yield of 4.5% (i.e., reasonably close to where we currently are). However, since the Global Financial Crisis, this premium has been significantly suppressed, likely due to large bond purchases by central banks.

It’s difficult to predict where this premium will go over the next year. On one hand, central banks are reducing their bond holdings, and national governments are running large deficits that need to be funded. On the other hand, higher coupons should attract investments either from a growing pool of retirees or from money market pools.

Changes in emerging markets may also affect yields in developed nations. Over the past year or two, the risk in emerging market debt has risen substantially. While the potential return has also risen, certain investors may determine that the risk is too great for their appetite. There may be a flow of investment from higher-risk emerging debt to lower-risk developed debt. We’ll be watching to see how this develops, and to see if this investment flow offsets reduced central bank purchases.

With investment-grade debt, we see companies still having a comfortable level of “ability to pay”. Absent a significant recession, we do not see this ability to pay being substantially adversely affected. We feel comfortable holding an overweight exposure to credit and feel that we’re being well compensated.


We have a barbell exposure in our core fixed income fund. That is, we hold some short-dated bonds and some longer-dated bonds. Overall duration is close to the benchmark and we’re comfortable with that position. Over the quarter, in noting the increase in short yields, we marginally increased the duration of our Government of Canada bonds.

Source: Bloomberg

Information presented herein is for discussion and illustrative purposes only and is not a recommendation or an offer or solicitation to buy or sell any securities. Views expressed are as of the date indicated, based on the information available at that time, and may change based on market and other conditions. Unless otherwise noted, the opinions provided are those of the authors and not necessarily those of CWB Wealth or its affiliates. CWB Wealth does not assume any duty to update any of the information. Investment decisions should be based on an individual’s own goals, time horizon, and tolerance for risk. Nothing in this content should be considered to be legal or tax advice and you are encouraged to consult your own lawyer, accountant or other advisor before making any financial decision. Quoted yields should not be construed as an amount an investor would receive from the Fund and are subject to change. Investors should consult their financial advisor before making a decision as to whether mutual funds are a suitable investment for them. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus, which contains detailed investment information, before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated. CWB Wealth uses third parties to provide certain data used to produce this report. We believe the data to be accurate, however, cannot guarantee its accuracy. Visit cwbwealth.com/disclosures for our full disclaimer.

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