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Rosy Market Expectations


2023-03-31, Joe Jugovic

With the weather warming, snow melting, and birds singing, no wonder investors are feeling more hopeful. Last year’s chill seems to be behind us as it’s estimated retail investors are pouring a record $1.5 billion per day into the U.S. stock market.

Most market forecasters have predicted a near-term halt to the raising of interest rates by the Federal Reserve and the subsequent green light for the stock market that would follow. The consensus also seems to be prepared for a short and shallow recession. We too hope for all the above but have learned throwing caution to the wind is not a great investment strategy.


Investors seem confident in the ability of the Federal Reserve to manage the economy in a prudent and profitable manner. We hang on their every word in the minutes of their meetings and wait with great anticipation for the release of the so-called dot plot.

The plot is each individual member’s projections of where interest rates will end up by a given point in time. Markets move up and down with billions of dollars transacting as these dots provide supposed direction. Yet investors seem to ignore that, even with all the data and tools available to Federal Reserve members.

Forecasting and managing the economy is more of a social science. It’s fraught with assumptions and unknowns more so than a simple mathematical formula with a proven outcome.

Take for instance the 2008 U.S. housing market collapse. At the time, the Federal Reserve incorrectly assured investors of the stability of the real estate market. Similarly in 2022, they significantly misjudged the inflationary forces coming out of the COVID-19 pandemic. Our comments are not to be hindsight critics, but to highlight the challenges of what the Federal Reserve is tasked with and why investors need to think twice about placing unbridled confidence in the policies and views of the institution.

Our guess is there will likely be more “surprises” as the Federal Reserve steers the economic ship into perceived calmer waters. The current disarray in the U.S. regional banking system is a gentle, or not so gentle, reminder of this.


Last year, asset prices (i.e. bonds and equities) experienced considerable distress. We now anticipate that the real economy will be impacted. Higher interest rates may affect lending, real estate markets, unemployment, and corporate profitability.

Now consider the consumer. A shopper in both Canada and the U.S. proves vital to the overall health of the economy as roughly two-thirds of the system is driven by consumer spending.

The unprecedented monetary policy during and after the pandemic has distorted spending habits in the past few years. We’ve seen a broad surge in consumer demand and nowhere has this been more noticeable than in the real estate market.

While it’s rarely been fruitful to bet against the persistent North American consumer, the combination of higher borrowing costs and the potential of a more challenging economy keeps us cautious. Cracks are beginning to show as Total Delinquent U.S. Consumer Loans have surged by nearly 50% in the past year, reaching the highest level since 2009.

Yet, there appears to be little concern. The rally cry seems to be “why worry if the Federal Reserve’s almost done tightening”. This level of complacency toward a more challenged outcome is evident in the survey below from the Conference Board. It shows that 93% of corporate CEO’s (up from 87% in Q4/2022) expect either “no recession or a mild one with limited global spillover”.

Source: Conference Board, Business Council

This concerns us as we know the best investment opportunities come from a place of concern rather than confidence. If the CEO’s haven’t built in much of a margin of safety in how they’re running their businesses, it’s our job as investors to enact that.

Just in case things aren’t as rosy as the market expects, we overlay our risk management process on our portfolios. Focusing on valuation, profitability, and strength of balance sheets has shown itself to be valuable in more challenging periods.

All views and projections are the expressed opinion of QV Investors Inc. and are subject to change without notice. This Update is provided for informational purposes only. QV Investors takes no legal responsibility from any losses resulting from investment decisions based on the content of this Update.


Joe Jugovic | Advising Partner

Joe fulfills an important mentorship role in the ongoing development of QV’s investment team.