Hello and welcome to the Download. I'm your host, Dave Richardson. Happy New Year, everyone. Or should I say Happy Stu Year and welcome to 2022. It's (S)Tuesdays. Stu, Happy New Year to you.

Happy New Year to you, Dave and to everyone who’s listening. I hope everyone had a good break.

Excellent. It's great to see you. Glad you came back and glad you didn't make a New Year's resolution to not come back as a guest on the podcast in 2022 because people love hearing your wisdom.

I was just on a walk with my wife and I joked, well, nothing's on the Weather Channel…

I'm sure she always appreciates your wisdom too, and agrees with everything you have to say. One thing that's probably not going to change this year, I know with my wife, she often questions my judgment. But when it comes to investing, we don't question your judgment. Here's the thing as we're talking about the New Year. One of the things that always gets me, around the investment industry and media; we start the New Year, and you have all of these features on financial news or even on regular news programs, you pick up the newspaper, the magazines in the stand, investing ideas for 2022, what to do in 2022… It's got to drive eyeballs; stuff on websites. But do you think about that in any way? You come back after a little bit of a vacation over the holidays and it's like oh, it's a New Year, we got to reevaluate everything we're doing. What's the big pick for this year? You just dust yourself off and just completely change courses. Is that what you do and what investors should do?

It's an interesting point. I tend not to do that too much. There are some year-end things related to taxes and things like this which do drive a very modest amount of behavior. But by and large, markets are relentlessly forward looking. Every day, every minute they're open, they are calendar agnostic. They are always looking what could take place in the next six to twelve months and how we should position for it. We tend not to really focus too much on just the turn of the calendar to reframe how we're thinking about the portfolio or certain investment ideas. It is a great time of year, just as we make New Year's resolutions, to go back and revisit investment process because process is what drives results over the long haul. So, scenario analysis is key to that, thinking about earnings and how they might arrive, thinking about valuations and what underpins valuations. What are interest rates going to look like? What is growth going to be? Those are the two underpinnings to the multiple that investments might trade at. We tend to refresh and recommit to our investment process. But as for looking at the cover of Businessweek and what's hot, that's not something that's a major focus for us.

As you say, the market is forward looking. We're just turning the calendar on 2022. In many ways, the market is looking beyond 2022, into 2023, and even further out. We've got what's going on with Omicron. We've got elections again, midterm elections in the US this year. We've got the Federal Reserve, which has been in the process of rethinking policy. As you look out though, in 2022, what do you think are going to be the drivers that could make the market nervous and drive some short-term reactions within the market through the year?

I think, as we look at the set up that we have in front of us right now, it is for pretty strong earnings growth. Corporations are facing some input cost pressure, but have been remarkably profitable. So, every incremental dollar of revenue has really driven significant growth in the bottom line. Generally speaking, profitability is going to continue. Valuations are elevated but unlikely to be interrupted by a modest shift in central bank action this year, as we move from having very accommodative monetary policy to less accommodative. What you worry about when you're in this situation is the possibility for an economic slowdown or a recession. We've talked about this in the past, how Eric Lascelles, our economist, has a group of indicators that show we're firmly in the mid cycle. What you worry about moving some of those bars to the right as the year progresses, and the two things are, I would say, today the market is somewhat comfortable that Covid is on its way to becoming endemic, and Omicron will be one of the final chapters. We have to be on top of that, because that could certainly upset things. But even then, I wouldn't say that is the major concern because the market is increasingly comfortable, with businesses’ ability to navigate through Covid. I think what people will inevitably worry about is the pace of the removal of monetary accommodation. It's such a fine line between tightening and removal of accommodation. As the year progresses, we're bound to deal with times when maybe people thought the Fed is going a little bit too fast, sometimes a little bit too slow. These are the types of things that may not have a big impact on earnings, but could impact the multiple that investments trade at for a period of time. This year might have some pockets of volatility that we haven't seen in a couple, but all things considering, it still looks reasonable from where we sit today.

Stu, we look at one of your areas of expertise— obviously in the dividend space—, and we talked quite a bit through last year of the advantages of these dividend paying stocks we're seeing, just in the first couple of trading days of the year where lot of those what-you'd-call more classic value names seem to be drawing money earlier in the year. I would take it that, aside from any other topic we cover, if we talk about dividend paying stocks, they look quite attractive right now, do they not?

They do because the current yields are quite attractive relative to fixed income levels. The prognosis for dividend growth looks pretty good, kind of in line with history, mid- to high-single digit. In the financial sector in particular, we did get some nice dividend increases at the end of last year, but they've been held back by some regulatory decisions through Covid. That can help a little bit further this year. But generally speaking, when we talk about dividend stocks— and I don't want to keep reverting back to this—, but there are two dimensions to an investment. There's the valuation and then there's the earnings. When we spend a lot of time with dividend paying stocks because they are more traditional or often more established businesses, the valuation can move within a range, but it doesn't likely get to levels that make it a significant concern. What you're dealing with as an investor is the volatility of earnings and right now, as I said before, businesses are quite profitable, and the outlook for earnings is pretty reasonable. As interest rates arise a little bit, it certainly helps some of the financial businesses, but it's also indicative of an economy that is starting to find its footing, on a basis where in the last twelve months we had very strong economic growth, but we didn't know how much of it was due to excess stimulus. If we get a better year of economic growth that's standing on its own two feet, then people will have some more confidence in the earnings that those traditional businesses are generating.

Two things we're going to want to watch: we're hoping we're not going to see any more negative surprises around Covid, and we're also hoping we're not going to see any policy making mistake from central bankers around the world, particularly the U.S. Federal Reserve, that's kind of leading the world on monetary policy.

Those two things, for sure. And then, just as we always do, we'll be looking at where we sit in the economic cycle dashboard pretty fervently through the year.

Well, Stu, great start to the year. Your resolution to be sharper in the New Year. Definitely, you're already on it. So you're at the top of your game coming into the New Year. And thanks for coming back and we look forward to fifty Stu’s days in 2022.

Thanks very much, Dave.