“How do you pick up a porcupine? Very carefully.” – Unknown
That is also how we approach advising clients and investing their money – very carefully. Today, that is truer than ever.
Strategy Update Highlights
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US multiyear economic expansion continues, with only one recessionary warning sign flashing…so far.
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Highly likely there will be Canadian and US interest rate cuts.
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We are back to normal market volatility. Portfolios have elevated cash positions, slightly underweight equities, and I am adding to fixed income. I have some index/portfolio insurance to help protect from the downside.
Fixed Income:
I’m surprised that we may see interest rate cuts in Canada and the US. While great for consumers, this tells us the bond market is concerned about the economy’s overall health. The continuing US/China trade war is negatively impacting global trade. Concerns about the growing impact and unintended consequences on the global economy has global interest rates reversing upward momentum.
We still have the yield curve inverted, which means medium-term interest rates dropped below short-term rates. On its own, this is only a 30% reliable recession predictor. As it was last quarter, the table below shows that other economic indicators are still in good shape.
A near-term US recession is still unlikely. I’ve said before that we are in the late stages of economic expansion and we will see the economy slow. The question is when the next recession happens, will it be mild or moderate? Last quarter, I sold off more preferred shares. I still have short-term and floating rate bonds exposure, but also increased global bond exposure. I plan to increase global bond using some alternative fixed income in the first few weeks of July.
Equities:
Current leading indicators show we are not rotating into recession. I do, however, expect to see volatility like we did throughout 2018, which we had not experienced in a while. It may have felt like 2018 markets were volatile, but 2018 actually had normal market volatility. The portfolio’s Canadian equity holdings performed better than expected and is almost fully invested to its target weight. I have some Canadian equity market downside protection in place until December 2018. That protection will likely increase as the quarter progresses.
With the US rally over the last quarter, I took some profits on US equities in US$ based accounts which slightly elevated US$ cash. With some equities breaking through targets, it was prudent to take some profits or sell. The continuing US/China trade conflict may complicate things further and we are monitoring this. One good piece of news was the Canada/US/Mexico (CUSMA) Trade Agreement (USMCA in the US) and the US removal on Canadian Steel tariffs. As well as a potential US and Canadian rate drop, Europe may also cut. Clearly, central bankers want to steer clear of rate hike induced economic problems. These rate decrease expectations can help lift equity markets.
Conclusion:
I remain focused on our pension style process, which previously helped deflect the portfolios from market volatility. I expect this to continue. While there will be down years, I work to limit the impact of market drops. I like the flexibility to respond to opportunities as they present themselves.
I wish you all a pleasant, relaxing summer. As always, I’m grateful for your continued support. Please get in touch with questions or concerns, or to set up a meeting. We always appreciate an introduction to family or friends who might benefit from our unique personalized approach.