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BMO Nesbitt Burns
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Newmarket, ON
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Market and Portfolio Update

We are sending this month’s newsletter earlier than usual because we wanted to inform you where we are situated in the model portfolios and to update you on both our short and long term views of the current stock and bond markets. We also wanted to provide you with a friendly reminder to ensure that you have all required tax related documents prior to filing your tax return.  We encourage you to wait to make sure you have all possible slips that were sent in the mail, which will be arriving in mailboxes in the next couple of weeks.  Please let us know if you have any questions.
Moving towards Green Zone:
We are pleased to inform you that we are now fully invested. The stock market itself is still in the Yellow Zone in our Equity Action Call, but it is rising towards green. Several of our other signals are already in the Green Zone; specifically, our BOSS indicator and our Price Action = Footsteps have signalled the breakout to the upside. Despite stocks not being in the Green Zone, it does not mean that there are no other places from which we can look to invest and profit.
In this regard, we always focus on the strongest of the various Asset Classes. Currently the top asset class is Commodities. They are rising just as the costs of all goods are rising in this expanding economy - hence the inflation we are witnessing. We don’t like the inflation – especially at the gas pumps and grocery stores. We can, however, capitalize on it. We may invest directly in commodities, or in companies that either are related to the sector or stand to benefit from their rise. Commodities include oil and gas, precious and industrial metals, agriculture, real estate, and other hard assets. For example, we own Exchange Traded Funds that invest in a broad basket of these items. We also currently own stocks such as Kroger, a huge grocery store chain in the U.S. that sells the basic goods and products derived from commodities.
Amongst other stock positions, we are also looking to own Financials, such as banks and insurance companies. This is because financials typically do well in a rising rate environment.
In the short term:
In the short term, we have seen markets form a strong bottom at which it has held and turned to the upside. We have therefore added to our stock and commodity positions and look to take part in the rise. The probability is for a return to the top of where we were at the beginning of the year. The question becomes, however, what happens after that?
The mid to longer term concern:
We are all seeing the inflation in the economy this past year. And we are now seeing the rise in interest rates to quell some of that. We have also watched the central banks around the world literally pour money (“stimulus”) into their economies to spur economic growth – inflation being the main side effect. Some inflation is good - the problem is it may be seriously overdone.
When commodities are rising, we can indeed profit from them. Historically, however, it has proven to be a double-edged sword.  Strong commodities can be a signal that the inflation we are seeing is in the beginnings of the “last gasp” of the breakout of a booming economy and by extension, the stock market.
Similarly, rising inflation and increasing interest rates also may indicate that we are at the peak of the economy and markets – and we may be leading into recession. As announced last week, the U.S. central bank has telegraphed it expects to raise rates at least six times this year. Additionally, the U.S. Fed and other central banks globally have indicated they are going to begin pulling back on the stimulus at the beginning month end. The idea is to slow inflation, bringing growth to a better pace to try to prevent an overheated economy which can lead to recession. Increasing rates AND reducing the stimulus could be like hitting the economy - with two hammers!
And regarding Bonds and Fixed Income:
The more immediate problem of interest rates is reflected in our Fixed Income component of the portfolios. It is the piece that investors have always looked to for safety because typically when stocks have gone down, bonds did not do so, or at least by not as much. That has now changed for those Balanced and Income investors - especially for those that always thought of this piece as the sleep-at-night factor. Fortunately, we are doing something about it.
Interest rates have declined over the past 30 years which was good for bonds and fixed income. They recently hit rock bottom and are going to continue to rise from here. But as rates increase, the value of fixed income assets is going to decline in value. We have already seen that in the last year. As of writing, fixed income assets are down as much as our stocks currently are (given stocks have bounced up some from the bottom). The point being is that we have already begun to reduce the risk in this asset class that had moved into the Red Zone. We will be looking to further reduce the risk – even if that means going to something near cash. We will continue to look to earn some interest on these assets, but our priority is not losing the capital.
The Geopolitical:
Finally, with geopolitical tensions comes volatility – we are still at 23 (on the Volatility Index – VIX) when 18 is our “get-concerned line”. Again, this demonstrates that the rising market may not be the indication that this recent pullback in the market is actually over.
Two scenarios continue:
As stated in our January newsletter, we were considering two scenarios for 2022 and they remain:
  • Our best case scenario is that we rise again to the top we saw at the beginning of the year. From there we may move slightly up, sideways, and remain sideways for the rest of the year. If that is the case, stock picking and holding favoured asset classes and sectors will be vital. It is generally difficult for stocks to break out further from that top – hence again the focus on commodities / financials. This latest move, and particularly in the growth stocks trade, may be short-lived at the top. All that will depend on how the Feds around the world handle this from here – I do not envy their job!
  • The alternate scenario, of course, is not pretty - that markets rising here may just be a short term “fake out” to the top. It may just a be a final bounce before we see the long overdue end of this bull market. It could very well hit the top and turn down again to the Red Zone. We are cautious.
Bottom Line:
We are approaching the Green Zone in our Stoplight and already Green in our other mid – short term signals. However, the longer term continues to be a concern given the direction of inflation, rates, and stimulus. Is this the last gap? A final run in the markets or “last gasp” like we saw in the late 90’s can still last a long time. That is why we are still comfortable being invested – maintaining and holding the strongest relative assets – while knowing we are watching our signals changing when the information changes.
We do not like to be negative on our outlook and we never want to see a Red Zone. But with chaos comes opportunity! No matter what markets do here, you are invested in a disciplined strategy designed to protect the downside. We have the signals to potentially take us to all cash if need be. That is, of course, very different compared to investors and money managers that still adhere to being invested in stocks at all times. Neither of the scenarios we have outlined will successfully survive buy and hold. We are watching all our indicators closely.
This has been a lot, we admit, and concerns are running high amongst investors. Should you have questions or would like to discuss in more detail, we are available to speak with you at any time.

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