As we enter December, we find ourselves still debating many of the same issues that have dominated the market and headlines over the past year. The effects of higher inflation, the Federal Reserve’s reaction to it, and the associated volatility have made it very difficult for investors and consumers alike this past year. So, staying focused on owning quality businesses has allowed us to keep a cool head and a steady hand even as stock prices have fluctuated.
Shifting expectations about the Fed’s interest rate tightening policies have negatively impacted asset prices this year. Initially, many investors largely underestimated the number and magnitude of rate increases. However, when the Fed recently indicated that it might step down the size of interest rate hikes, the market responded with the most substantial gain for a quarter since the pandemic rebound in the second quarter of 2020.
A better year may lie ahead, but volatility may remain high in early 2023 as recession fears persist. In these moments of extreme uncertainty, we have always relied on history as our guide. Our preference is for quality companies that pay dividends and grow their dividends, a sign of financial strength and good cash flow. History demonstrates that higher dividend-paying stocks have outperformed during past recessionary bear markets and are outperforming again this year across sectors and countries. There can be no guarantees in investing. But what ultimately matters is not what we know about the future; it’s what we do along the way. Cardinal Capital has spent the last thirty years building portfolios of high-quality companies at reasonable valuations that provide superior risk-adjusted returns in both good and bad market environments.
The market rarely does what we expect, and today’s uncertainties are no different from the past. The foundation for a recovery will be built slowly. We are not sure when the turn will come, only that it will, just as it always has in the past. The importance of positive signposts and even the absence of adverse developments will increase as the market tries to find its footing over the next year. In the meantime, we continue to find promising opportunities across our portfolios amid today’s uncertainties, knowing that the best times to invest are often when others are avoiding the market. We continue to follow our discipline, seeking to identify those companies that we believe will benefit from a potentially stronger economy years from now. As always, we do so with an eye on risk and using valuation as our guide.
As we approach the end of a turbulent year in the financial markets, we are mindful of and thankful for the trust you have placed in us. Cardinal Capital Management has continued to grow, and we hope our investment philosophy has continued to serve you well. We wish you all a joyful holiday season.