And we are glad to say that a tumultuous year for both stocks and bonds, is now behind us.
Yet while we consider 2023 is likely to be better, it may not really seem that way for a while.
At least while the fight by central banks over inflation must continue and to do so without incurring a deep recession and roiling markets further. They must do that in the face of continued COVID-19 issues and resulting weakness in China, the relentless battle for Ukraine and the West versus Russia, a further breakdown in Crypto currencies and potential for a contagion, and a bitter divide in U.S. congress.
On the upside, market will look 12 – 18 months out and expect to see a light at the end of tunnel and likely improve significantly by the second half of the year.
Regarding the portfolios and investment strategy, at the beginning of December we saw our Stoplight; Equity Action Call move fully into the Green Zone. Unfortunately, within just a couple days, the market pulled right back on all the negative news. The typical Santa Rally failed to produce. We did take some of that downside, but fortunately we are closely watching our shorter term signals. They quickly flashed to Yellow then Red Zone and hit our “stops” that we had set up to protect on further downside. We were able to avoid about half of the pullback and continue to be in a position to defend further downside and potentially pick up all the upside should markets rebound.
The market is currently trending very much “sideways” close to the lows of the year, with one day up, the next down. Therefore, the portfolios are sitting on a lot of cash (money market funds) and some alternatives. Less than 30% of the portfolio is invested in stock ETF’s.
Every day our shorter term signals have us looking at the probabilities for the next move in the market: Why? Because this is exactly what the computers and algorithms that now trade 80% of the market are looking at. We are not looking to beat them – but with the structure of trading they provide, we can and will trade along side them.
The market pulled back and has since been moving sideways since mid-December. It will only do so for so long until some sort of news or catalyst pushes investors to consider how it will evaluate the new current value of the market. If it is higher or lower, the catalyst will drive it in that new direction. Until then, the cash and alternatives will protect us.
That said, the greater probability from a technical perspective is that this may be the bottom in which case any sign of a breakout to the upside will have us invested. And in a safer position as starting from close to the bottom, with the potential for picking up what may be a very nice initial move in the markets.
Alternatively, the negative news may be too overwhelming, and we may see a catalyst for further downside. In which case we simply sit tight and allow the ETF’s we hold to profit from the downside. We may look to add more alternatives that can profit form downside and that may include Gold, which is finally beginning to act like the safe haven it has been in the past. For example today as of writing, markets are pushing the markets lower and yet we are positive.
In all cases, we will “sit tight” for the breakout until it happens. And upon getting on offense or defense, we are closely watching and utilizing the shorter term signals and “stops” to protect us. No matter the direction, we are prepared to navigate whatever the news brings us.
We would like to begin with a viewpoint on inflation and rates. Rates will continue to rise and with it the risk of a recession. The question is how deep. The U.S. Fed has even intimated that a upside in the stock market may only exacerbate inflation and the need to keep the market lower for longer. High inflation also comes with lower unemployment. The central banks have also indicated that it will take more job losses and higher unemployment before we see inflation decline. We have already seen significant job losses in the tech sector. And even the big banks in Canada have begun layoffs and or hiring freezes. We expect to see more across the board.
For more, we provide the following comments form our BMO Capital Markets Senior Economist; Sal Guatieri.
On the seemingly endless war and invasion by Russia in Ukraine, the Russians are losing and even this past week the Russian army has shown their continued lack of desire to fight and inept ability to win. This following summary comes from the always well-informed Greg Valliere, Chief U.S. Policy Strategist, AGF Investments, with whom we have had webinars with in the past:
On China’s precarious reopening bounce, this from Investing.com:
Getting worse before things get better is a theme that extends to the world’s other economic powerhouse, China.
While the fate of wars is inherently unpredictable, the progress of a lethal virus is typically much easier to forecast. China’s Communist leaders, rattled by the first sign of protest against their party, have thrown caution to the winds and effectively let COVID-19 rip. Herd immunity and the release of animal spirits by Chinese consumers should follow, but only after a wave of infections and deaths unlike anything seen so far in the three years since the virus first showed its face in Wuhan.
For the last couple of years, stringent public health regulations have been the chief culprit for anemic Chinese growth. But next year, with regulations largely lifted, the key factor will instead be fear of a virus for which Chinese medicine still has only partially effective cures. Fear may stay within manageable limits as long as China’s health system is not overloaded, and recent reports of big increases in emergency capacity suggest that the authorities are at least trying to get ahead of the curve. However, if cases outrun system capacity, then deaths will spike and the behavior of China’s consumers and industrial workforce – such as those packed cheek-by-jowl in Apple’s iPhone City in Zhengzhou – will become unstable in the extreme.
Surprisingly given the concerns in China, the Emerging Markets, particularly the Far East, are beginning to look stronger with those markets have taken a bigger hit over the past couple years and are now trying to open up. Should they hold here, it could see us adding some limited exposure.
And a good summary from Investing.com on the Collapse of Crypto:
And lastly, we provide the following comments from our BMO Wealth Portfolio Management Strategy Team to which we think best summarizes what to expect going into this new year:
By far our greatest concern is for inflation and the potential for a soft landing or a deep and hard landing into recession. The remainder of the risks may not cause a market breakdown but will certainly continue to create higher levels of uncertainly and with it, volatility.
We are in the Red Zone but as we are very close to the recent bottoms, we see a higher probability of approximately 60% for markets, at least in the short term, to move to the upside. Initially, the markets could move up to the high before the recent pullback in early December. We will look to take advantage in that upside and then get defensive again as we wait for the next move. There is still however a 40% chance of downside risk. Accordingly, we must wait for the breakout of markets, in either direction, and maintain protective stops and positioning no matter which way they take us in navigating these precarious markets. Unlike buy and hold, there are great opportunities going forward, in either direction.
We wish you all the best in in 2023!
Best regards,
John & Megan.