It’s hard to believe, but the first half of the year has come to a close. While it’s been eventful, one could argue it’s been relatively dull compared to a year ago. Interest rates are still rising, but less aggressively than last year. The rate of inflation is decelerating, rather than accelerating. And, economies have proved resilient, still largely growing despite what many had predicted at this time last year.

 

Global stocks and bonds are higher year-to-date, despite the near universal concerns around the interest rate backdrop. In some cases, the returns have been modest with global bonds and Canadian equities up a few percentage points. In other cases, like international equities, the gains are larger. The U.S. equity market has looked strong. Yet, beneath the surface, its gains have been less compelling as the technology sector (i.e. FAANG) has had an outsized impact. In some ways it hasn’t been surprising as some of these stocks were responsible for driving much of the U.S. stock market decline last year.

 

Our firm’s global investments team regularly produces thoughtful content to help us think about the future and assess the positioning of our clients’ portfolios. It recently produced its mid-year outlook, in which it discussed the rally in asset prices since last year’s lows. It acknowledged these trends may continue in the short-term, but also highlighted the increasing number of economic indicators that are pointing to more challenging times ahead. It remains of the view that investors should be prudent and ensure they are positioned to navigate through a more difficult backdrop in the future.

 

I largely share this view as I believe the amount of rate hikes of the past year will eventually wear on consumers and businesses. One of the biggest adjustments has been in fixed income where bonds have re-emerged as a useful tool. The level of income that can be generated from bonds today is substantially more attractive than it’s been in years, with yields that are hundreds of basis points, or a few percent, higher. Moreover, while inflation remains a risk, I believe bonds can offer renewed diversification and protection for portfolios in the event the economic backdrop worsens.

 

Tim