With nearly two months left in the fourth quarter, the CE Portfolio is back in position to turn a hat trick—that is, to make 2011 the third consecutive year of double-digit annual returns.
Whether that happens or not depends heavily on the factors that laid the market low this summer and fall.
If we avoid the doomsday so many still expect and the market mood lightens, the massive risk premium now priced into Canadian stocks—and the Canadian dollar—will vanish.
On the other hand, it's still possible Europe will fail to resolve its sovereign debt woes without a banking crisis. Should that happen, we could see a dramatic tightening of borrowing conditions and weakened global growth, with even resilient Canada sliding into recession.
That, in turn, would cause more companies to stumble, with natural resource stocks the most likely candidates for dividend cuts and worse.
The mere threat of such an event is likely to keep things churned up the rest of the year. Unfortunately, this means we're almost certainly going to see more bad days, as investor euphoria swings to fear.
Fortunately, the key to superior returns remains the same. Keep careful tabs on the health of the companies you own. As long as your companies are healthy, growing and paying dividends, their stocks will recover any losses they suffer in the near term.
This is the lesson from the very profitable aftermath of the 2008-09 crash/credit crunch/recession, which was arguably the worst market and economic event since the Great Depression of the 1930s. And it's certain to be the case this time, no matter how turbulent the coming months are.
Both the Aggressive and Conservative holdings are currently ahead of the typical Canadian blue-chip stock, as represented by iShares MCI Canada Index Fund . There is, however, a wide divergence in performance this year between resource-price-sensitive Aggressive stocks and recession-resistant Conservative Holdings.
Investors are still pricing stocks perceived to be risky at huge discounts to those considered safe. The silver lining is the discounted have a very low bar of expectations to hurdle, which is all it takes to catalyze a stock price recovery.
That, in essence, is why I continue to hold a range of stocks, rather than focus solely on the safest in this uncertain environment. And it's why I consider the same stocks that took the worst beating this summer to now have the greatest upside—as strong company performance forces perception to shift in a more positive direction.
Thus far we've seen nice recovery moves for Colabor Group , Newalta Corp and Parkland Fuel Corp following the release of better-than-expected third-quarter numbers.
I anticipate the same for battered stocks like IBI Group and Just Energy Group as they announce in coming weeks.
The other strongly bullish factor here in late 2011 is the return to dividend growth, particularly AltaGas's 4.5 per cent boost is its first since converting to a corporation last year, and will be followed by much more going forward. Meanwhile, Keyera Corp's 6.3 per cent boost is another in a long line equally certain to continue.
In a volatile market like this, stocks often move dramatically for reasons that have little or nothing to do with business health. Eventually, however, prices follow dividends. And that makes the return to dividend growth the most reliable catalyst for gains.
For many money managers, it is fourth and long here in late 2011. And only a successful "Hail Mary" will save an otherwise dismal year, as well as year-end bonuses and probably jobs.
Individual investors' clocks, however, don't stop on December 31. Having a good calendar year is nice, but whether we're underwater or well in the black on any set date isn't what's important.
That gives us the freedom to stick with good companies, even if market opinion temporarily turns against them. Coupled with diversification to guard against the occasional stumble, that's the key to building wealth in our favorite Canadian stocks, even as we collect what are still the world's most generous dividends.
Roger Conrad is editor of Canadian Edge