Monday, July 11, 2022

Q3 Outlook


The bubble has popped. We do not know whether the after shock is  already over or will carry on for some time. The factors we have worried for some time are still here; war in the Ukraine and Covid19 still holding much of the supply chain in limbo. Rumblings of conflict with China over Taiwan have surfaced again. Central bankers have been throwing money at the problems now for over a decade. That is usually a recipe for inflation. We no longer need to question if there is inflation, just look around. Cars are selling at thousands above list price and gasoline prices are more than double in most parts of the world.

Ironically, deflationary forces that brought rates to zero and negative in some parts of the world are still in place, trends like ageing population, automation, and a growing understanding that we can not keep overconsuming and hope for the best. Even the planet is creaking under our frivolous spending habits. 

Slowdown or recession are showing early signs from retailers like Walmart and Target. A slowing economy combined with inflation also known as stagflation is not a friend of investors, stocks go down, bonds go down and this time unlike the 70’s even real estate prices go down. The well known investment strategy of having a diversified portfolio stops working. This quarter, hedging strategies like being short instead of long and oil and gas were the only winners. My experience with resource stocks is that they can give you return but take it away quickly. Unfortunately stalwarts like banks and utilities were also trashed this quarter.

In my career I have seen over half a dozen stock market corrections and crashes. Each time the market rebounds and goes on to make a new high. While I expect this one to be a longer lasting, nonetheless this too shall pass. My strategy is to wait for a sign that some of these issues fade away and rearrange the portfolios to reflect the new global reality.

So far this year, S&P500, the widely followed US stock market index is down by -17.7%. Thanks to a dramatic rise in oil prices, our Canadian market has done better again, down by only -8.8% but Canadian bond market, the ones that are supposed to stabilize our portfolio, has collapsed due to rising rates, bond universe down by -13.2%. 

Market is quite volatile responding to each turn in sentiments on how the global economy will unfold. I prefer not to make serious strategic changes to our portfolios until a direction emerges.

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