Driven by a reduction in the prime interest rate in both Canada and the U.S. as well the growth in the artificial intelligence (AI) sector, the markets in the 3rd quarter continued to hit record highs. This expansion has started to fuel talk of a bubble in the market and, in fact, valuations for many companies has become very high. The S&P 500 index, for example is now trading at over 30 times annual earnings, levels not seen since before the financial crisis in 2008. Some individual companies are trading at even higher levels: Nvidia and Tesla are trading at more than 40 and 180 times respectively.
As the Ontario Arts Foundation has a focus on value investing – buying good companies at reasonable prices – we have not been invested in many of these companies and have not, therefore participated in some of this market expansion. Nevertheless, we have still seen very respectable returns of 3.7% for the quarter, and 4.5% year to date.
Perhaps more importantly, we are in a better position to preserve value if there is a correction. The old adage of what goes up, must come down. The corollary is that what goes up quickly, comes down quickly. With the froth in the market recently, there is increasing concern about a market correction. After the end of the quarter, the CNN Fear and Greed Index moved into the “Extreme Greed category driven, in part, by U.S. regional banks taking substantial loan loss charges amid fears over the health of their lending businesses. The concern being that these charges are just the tip of a larger iceberg.
Of course, we don’t know if there will be a significant correction, of when one might occur. We do know that we have a solid portfolio, and it will continue to provide solid returns over time.
In the meantime, we will be watching closely. As Warren Buffet famously said, , “There is seldom just one cockroach in the kitchen.”