Observations from the bridge

Jan 17, 2019 | Jeremy Goldfarb


Those that know me well, are aware of my fondness for boating, and any marine related activity for that matter. I often work metaphors into this blog using language from the sea, and today is no exception. As I look over 2018 results, current economic data, technical charts, and just general consensus I am growing ever more certain that the rising tide has generally reached its peak. We are running through some light chop, but the sea is building ahead so we have to be prepared. Here is a look at some key points that were brought up in a call this morning.


1- 2018 returns were bad all around --  We looked at the average return in local currency terms (ie. excluding the impact of CAD) of seven asset classes: Canadian equities, U.S. equities, EAFE (international equities), EM equities, Canadian bonds (universe), high yield bonds (US), and global bonds.The average return in 2018 across these seven asset classes was negative (-5.8%), while the highest return was +1.8% and weakest return was -14.6%. There simply weren't a lot of places to hide last year. Fortunately, the USD strength (up nearly 8% relative to CAD) helped those with USD exposure to offset some of the weaker price returns across most asset classes.


2- It's late cycle --- there is no doubt that it is much later in the cycle and a softening patch is going to be coming. The ultimate question however is whether the softening will be a run of the mill variety, or something more severe. At this point it's far too early to tell, but defensive portfolio positioning is going to be key


3- The yield curve and other warning signs -- be wary of these now as in later stages, they tend to become more influential in terms of sentiment, and then bite in terms of reality. The yield curve flattening is a real example of this. Out of our current recession warning indicators, it is the only one that is flashing yellow (see previous blog note)


4- The benefits of dollar cost averaging -- I read 2 interesting articles last week on the benefit of dollar cost averaging. My point here however, is that jumping in, or out of markets depending on their direction is a fool's errand at worst, and extremely challenging at best. You are far better served to man the helm in terms of your strategic asset allocation and rebalancing, and have a disciplined contribution schedule. This will provide you with natural dollar cost averaging


Below are links to 6 recent publications from RBC Global Asset Management that I would encourage you to read if you would like more detail

1- Correction

2- Asset Allocation

3- Canada

4- Logical Defence

5- Late Cycle


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