What a difference 3 months makes. In our Spring 2019 note, we provide our commentary on the recent market turn around and the changing interest rate landscape.
“What, me worry?” ~Alfred E. Newman
Spring has sprung and it seems to be re-energizing the market. Since the last strategy update, we have seen quite a market rebound and a number of interesting developments.
Strategy Update Highlights
-
After the late 2019 equity market drop, I increased equity exposure. Given the rapid recovery since, and the likelihood that we’re in the later stages of economic expansion, I’m considering lowering equity exposure. Stay tuned.
-
Both Canadian and US interest rate hikes have been put on hold, which may help extend the economic cycle and equity rally.
-
We expect normalized market volatility to remain. Portfolios have elevated cash positions, slightly underweight equities and fixed income and some index insurance to help protect the downside.
Fixed Income:
Good news for consumers as interest rate hikes in Canada and the US are on hold. This provides market support and has likely extended the economic cycle. There is the slight possibility of a rate cut, rather than increase. Additionally, Canadian and US mortgage rates have both fallen, a boon to current and wannabe home owners.
Another development is the yield curve inverted (forgive the jargon). What this means is that longer-term interest rates dropped below short-term rates. In this case, 10-year US rates dropped below 3 month rates. Economists watch this indicator closely; however, it is only 30% reliable. The table below shows that other economic indicators are still in good shape.
The table above currently shows that the US is unlikely to move into a recession in the near term (by the way, Canada is unlikely to, as well). We are, however, in the late stages of expansion, which naturally coincides with a slowdown.
It is for this reason that the fixed income exposure is underweight preferred shares, medium- and longer-term bonds emphasizing and short-term floating rate bonds. It is also focused on high quality, liquid, short duration fixed income. As I keep my eye on the interest rates direction, I may increase global bond exposure.
Equities:
Canadian and US equities are in line with long term average valuations. The large market rebound from the 4th quarter drop, (including the Scrooge-like Christmas Eve drop) brought most indexes back to near previous highs. The US
equity bull market that started in March 2009 is one of the longest on record. Canadian equities, however, have not experienced the same strength during that time. Over the past several years, US and international equity and foreign fixed income exposure helped portfolio performance compared to a primarily Canadian focused portfolio.
This quarter’s equity portfolio rebalancing included some profit taking and placing some put (insurance-like) protection to protect against US and Canadian equity market drops. As most of you know by now, I focus on deflecting portfolio drops by selecting companies with growing dividends and lower volatility.
2017 was a period of unusually low US and global market volatility. I’ve cautioned over the past two years to expect more volatility and a broader market correction. A disciplined pension style selection process is key to navigating market volatility.
Going forward, a resolution to the US-China trade conflict, US tariffs removal on Canadian Steel, and oil price stabilization would remove a lot of uncertainty. Additionally, for Europe, where I’ve deliberately kept portfolios underexposed, some clarity on Brexit would also help.
Conclusion:
While the recent market volatility is familiar to us, this volatility is not something investors have experienced for a while. (For newer investors, maybe never.) Through this we keep focused on our process.
We wish everyone a terrific spring and, as always, thank you for your continued support. We love hearing from you so please contact us with any questions or concerns, or to set up a meeting. Additionally, we always appreciate any introductions to family or friends who might benefit from our unique personalized approach.
