Top picks from Gordon Reid, president and CEO, Goodreid Investment Counsel
Equity markets in the first 45 days of 2023 have proven the crowd wrong again, a possibility we referred to in our 2022 year-end commentary. The rally has been powered by a growing belief that the U.S. Federal Reserve may take a pause earlier than expected, that the economy is far more resilient than many had feared, and finally, that corporate profits have not been as weak as feared.
The temptation to trade into low quality issues should be avoided. This group was the first to suffer in the bear market and it is not unusual to see them lead in the early stages of a new bull market. If prior cycle scripts are followed, money flow will transition toward better quality companies soon enough. We have been fortunate at Goodreid to have had a very strong earnings season, leading to strong performance to start the year.
Key to this market will be inflation data. Both Canada and the United States suffered debilitating monthly high inflation readings in the first six months of 2022. This leads to easier comparable numbers in 2023. We expect the annual inflation reading in both countries to fall sharply by midyear, giving central banks enough cover to pause rate hikes.
The market will have to grow accustomed to the “new normal” in rates. Talk of a cut in rates later in the year being constructive for equities is “Pollyannish” in Goodreid’s opinion. In fact, if we do witness rate cuts it will likely be for the wrong reasons, i.e., a weak economy sliding into a recession. The next cycle will likely be defined by strong, growing companies able to operate profitably with interest rates at current levels.
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