Monday, April 10, 2023

Outlook 2Q

 Economy is not any better than the last quarter yet markets have rebounded some; Canada TSX up by 4.6%, US S&P 500 up by 7.4% and even the bond universe is up by 3.2%. This impacts positively on most of our portfolios but I am still not sure that it is a sign that we are headed back to the heady days of 2021. In fact I am not sure that the worse is behind us since none of the worries like war, inflation and heavily debt laden world economies, is done yet.

This bumped up quarter is however good news as it gives us a pause to upgrade our portfolio by positioning for what may happen once the economy finds its steady state. We are not going back to zero interest rates any time soon, so the steady sate will have interest rates in the 3-4% range if inflation does turn out to be transitory albeit a little stickier. 

The result of higher interest rates while not unexpected has caught many banks by surprise as what they hold became worth lower that what they owe. Not too dissimilar to a family living exclusively from the value of their homes, like a reverse mortgage. If your income is tied to the value of your home, you will be receiving less. Banks are worth less than before the rates rose dramatically last year.

What if this is not the bottom of the cycle since corporate earnings are likely to be lower in next few quarters in nearly every sector? That would be an opportunity to complete this asset upgrading strategy and settle in for a steadier climb which markets naturally tend to do. Waiting with some extra cash in instruments such as high interest money market funds is prudent for the months ahead.