Doherty Market Commentary Q3 2024

If you were properly enjoying your summer (as you should) then the 3^rd quarter was a positive one with not much to write home about. For those paying attention to financial markets, volatility was significantly above what we have seen in recent periods. Skepticism emerged about how long it may take for AI investments to pay off in profits for companies. Geopolitical tensions continued to rise, and the US election was thrown a curveball with Kamala Harris entering the race. This was all punctuated with the beginning of interest rate cuts south of the border. Indeed, those interest rate cuts spurred more positive sentiment in markets.

Canadian stocks performed well in this quarter, leading G7 economies after lagging in the first half of the year. Strength in financials and technology shares were partially offset by weakness in energy. Royal Bank led the way with continued success in its integration of HSBC Canada. Issues at some banks, particularly the compliance issues for TD in the US, raised some concerns, however, this ultimately was overridden by reflection that their balance sheets are quite strong and valuation attractive. A change in CEO for TD further allayed investor fears. Also, rate cuts will help all borrowers and alleviate some concerns with respect to credit quality.

US markets had a tepid quarter ranking near the bottom of global benchmarks. Angst with respect to valuations and sustainability of momentum grew, and volatility spiked in some technology names. Nvidia, the darling of AI investors, was a perfect demonstration of this. The stock rose and fell 15 to 20% in a few days several times during the quarter only to end up “flat” over three months. This amount of volatility is normally reserved for penny stocks, not trillion-dollar companies, but when valuations and greed reach peak levels, this is the type of behaviour that can be expected.

Internationally, the MSCI grew slightly better than the US with Australia leading the way along with Germany and Switzerland. Interest rate sensitive sectors such as financials and utilities performed well on the prospects of lower short-term rates. Japan lagged as the Yen appreciated and international energy shares sold off on fears of growing supply from Saudi Arabia.

Looking forward, the likelihood of continued volatility in stocks is high. The US election is sure to provide some fireworks and historically markets have been volatile during election cycles. It is also true that volatility proves to be temporary and serves as a possible opportunity for investors looking to buy quality names “on sale”. The big question in the near term is the durability of the current cycle we are in and the sustainability of US stocks in particular to hold on to elevated valuations. The S&P currently is trading about 30% over its historical valuation and could be susceptible to a large pullback if growth concerns emerge. Of course, this is heavily skewed by a few technology names, and we focus on capital preservation by buying quality names - not the “index”.

Over the long run, volatility proves temporary and more opportunity than threat. As Mr. Buffett likes to say, be fearful when others are greedy, and greedy when they are fearful. We have confidence the companies we own are trading at reasonable levels and are set up well for long term success. We will also continue to diligently look for quality companies to own for the long run. Building sustainable success requires discipline and patience and we will stay true to our focus on quality.