The Reporter – Third Quarter 2023


Surging interest rates were the big story last quarter. To put things into perspective, the 10-Year US Treasury rate spiked a whopping 80 basis points from 3.8% to 4.6%. The increase was caused in part by remarks made on September 20 by Jerome Powell, Chair of the US Federal Reserve (aka the Fed).

He signalled that rates would stay higher for longer than previously expected due to the strength of the economy. In June the Fed was forecasting 1.1% GDP growth and 4.5% unemployment for 2024, but now it's singing a much happier tune: 1.5% growth and unemployment down to 4.1%.

The Fed's rosy economic forecast was borne out early this quarter by surprisingly strong data from the ISM Manufacturing index, the Job Openings and Labor Turnover Survey, and nonfarm payrolls. As a result, the 10-Year US Treasury rate broke 4.9%, reaching a 15-year peak.

The same holds true for the Canadian economy, but to a lesser extent. The economy's strength has been on full display, even as interest rates have climbed. Household debt is becoming an even bigger concern, but the housing market has continued to shrug off the rate hikes and post solid numbers. In the US, where the average rate for a 30-year fixed mortgage1 topped 7%, 62% of mortgages are still under 4% and 92% are under 6%. In Canada, many mortgage lenders have been forced to stretch amortizations beyond 35 years to manage skyrocketing rates. Royal Bank and TD have reported that nearly a quarter of their customers have opted for these extra-long amortizations.2

The stock and bond markets were clearly hard hit by the big jump in interest rates. In the bond market, it all comes down to the well-documented inverse relationship between interest rates and fixed-income security prices. On the equity side of things, the rise in the S&P 500's price-to-earnings ratio seen over the first half of 2023 hung on hopes that the Fed would cut the key interest rate multiple times next year. In that scenario, investors were projecting earnings per share growth above 10% for S&P 500 companies in 2024. But now that interest rates are set to stay high, stock prices have fallen as growth forecasts have darkened.

As you can see, investors have actually taken all this good economic news pretty badly since it's soured the 2 main asset classes. Oil was the only asset class that turned a profit in the third quarter. And that was the upshot of the agreement between Saudi Arabia and Russia to extend their oil production cuts, which put upward pressure on prices.


S&P 500 -0.96%
S&P/TSX -2.20%
NASDAQ Composite -1.64%
FTSE Canada Universe Bond Index -3.87%
Gold -3.68%
Oil 28.52%


S&P 500 13.18%
S&P/TSX 3.44%
NASDAQ Composite 27.25%
FTSE Canada Universe Bond Index -1.46%
Gold 1.35%
Oil 13.1%


It can be hard for portfolio managers to stay on the defensive. That's been especially true as rolling waves of optimism have washed over the media, while financial experts have hailed stock market rebounds, especially the one earlier this year, leading to more buoyancy. Hence the reason we put capital protection front and centre in our investment decisions and tune out the emotional noise that pervades the market.

Our recession forecast model is advising caution. It's telling us that the full impact of monetary policy remains to be seen due to the lag effect3 . Plus, the current risk premiums4 are encouraging us to hold bonds. So we've actually been quite comfortable with our positioning. We've reacted by increasing cash holdings in the Growth portfolio by just over 4%, temporarily exceeding the 20% maximum in the second half of the last quarter.

Our strategy not only generated a positive return, it also outperformed our benchmark index (which has posted a negative performance for the past 3 months) by 3.17%. Thanks to gains on our preferred share and bond holdings, the Balanced Tax Efficient portfolio ended the quarter up 2.13%.


TYPE OF PORTFOLIO OBG Benchmark index Added value
GROWTH +1.55% -1.62% +3.17%
BONDS -3.12% -3.87% +0.76%
PREFERRED SHARES +0.54% -1.42% +1.96%
BALANCED TAX EFFICIENT +0.04% -2.09% +2.13%


TYPE OF PORTFOLIO OBG Benchmark index Added value
GROWTH +5.68% +7.53% -1.85%
BONDS -1.17% -1.46% +0.29%
PREFERRED SHARES +2.11% -1.28% +3.38%
BALANCED TAX EFFICIENT +3.00% +3.09% -0.10%


In a recent French-language video entitled "Un positionnement prudent qui n’a rien de pessimiste" (A conservative stance that isn't gloomy), portfolio manager Daniel Ouellet circled back on some of the concepts mentioned in our newsletters, including the lag effect and risk premiums. Even though we're taking a prudent approach in these uncertain times, our elevated cash holdings do give us the flexibility to seize attractive investment opportunities as they arise.


Our moves are based on a method that combines quantitative analysis, including our trusty 3-for-1 principle, with qualitative analysis, which focuses primarily on analyzing fundamentals. All total and partial sales in the last quarter followed this logic. In the Appendix, you'll find a summary of these transactions, along with a memo explaining Johnson & Johnson's (JNJ) spinoff of Kenvue (KVUE).

After peaking at over 4,600 points in late July, the S&P 500 has fallen by about 10% and settled at around 4,200 points. That prompted us to invest nearly all of the excess cash accumulated in the third quarter (3.7%) in 3 new positions in the Canadian market in early October: BCE (BCE.TO), Telus (T.TO) and TC Energy (TRP.TO). Stay tuned—we'll explain the reasoning behind these transactions in a future newsletter. And then you'll see that a drop in financial markets can actually signal good news!


AmerisourceBergen (ABC) Total sale $183.99 August 17
McKesson (MCK) Partial sale $428.30 August 17
FedEx (FDX) Partial sale $265.38 August 17
Alphabet (GOOG) Partial sale $128.96 August 17
SNC-Lavalin (ALTR.TO) Partial sale $128.96 August 17
Pfizer (PFE) Addition $36.79 August 23
Verizon (VZ) New position $33.16 August 23
Kenvue (KVUE) Total sale $22.99 August 25
Johnson & Johnson (JNJ) Addition $166.91 August 25
Honda Motor (HMC) Total sale $34.20 September 12

To give the company more strategic flexibility, Johnson & Johnson's head office announced it was spinning off its consumer health unit, Kenvue, which is known for famous brands like Tylenol and Band-Aid. Johnson & Johnson shed some 80% of its shares in Kenvue, which has become a separate publicly traded entity. Johnson & Johnson shareholders were given the opportunity to trade some or all of their shares for Kenvue shares at a 7% discount.

We intend to maintain our position in Johnson & Johnson and sell off Kenvue once the shares are issued. We made transactions on both stocks in the registered accounts to avoid any tax impact. The good news there is that the move generated a 10.7% profit!


Anderson, D. 2023) "Nearly Everyone With a Mortgage Has an Interest Rate Below 6%, Prompting Many to Stay Put," Redfin News, June 14.

Labby, B. 2023) "Longer amortization periods leave some mortgage holders 'stuck' and unable to get ahead financially," CBC News, September 4.

  1. It's worth pointing out that we're talking about the most common type of mortgage.Return to footnote 1 referrer
  2. Labby (2023)Return to footnote 3 referrer
  3. This refers to the time it will take for the cumulative effect of recent interest rate hikes to work their way through the economy.Return to footnote 5 referrer
  4. To compensate for the additional risk that holding stocks entails, investors expect higher returns. But the risk premium is at its lowest level in 20 years, meaning equities are currently less attractive than bonds.Return to footnote 7 referrer

Each Desjardins Securities advisor named on the front page of this document, or at the beginning of any subsection hereof, hereby certifies that the recommendations and opinions expressed herein accurately reflect such advisor’s personal views about the company and securities that are the subject of this publication and all other companies and securities mentioned in this publication that are covered by such advisor. Desjardins Securities may have previously published other opinions, including ones contrary to those expressed herein. Such opinions reflect the different points of view, assumptions and analysis methods of the advisors who authored them. Before making an investment decision on the basis of any recommendation made in this document, the recipient should consider whether such recommendation is appropriate, given the recipient’s particular investment needs, objectives and financial circumstances.

Back to top