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Market and Portfolio Update

Happy May! Hopefully we will start to actually see some spring weather soon...
Markets continue to be stuck in rough weather. We are currently hovering just above the stock market lows of the year and are still in the Yellow Zone of our Stoplight. For our shorter-term Footsteps and BOSS indicators, we are currently in the Red Zone. The Volatility Index (VIX) continues to be of concern as it remains high and well above our safe zone. We are currently sitting at about 25% cash in our large model stock portfolios. We may be using some of that cash to take advantage of short-term trades and volatility, but with a stronger view on portfolio protection mid to longer term.
Our portfolios, though over weighted in U.S. stocks, are doing better than the American market (our main market) and are a little behind the Canadian but picking up ground. We are down on the year but are quite happy with our allocation at this time and consider ourselves well positioned.
For context, as of writing here on Thursday morning, the Canadian market is down over 4% (and 6% from the high) year to date (YTD), the U.S. S&P500 broad market down by over 13% YTD, and the U.S. Nasdaq (growth and tech stocks) down by over 22% YTD. Even Canadian banks are down over 13% YTD. And bonds, to which investors typically look for safety, are actually down over 12% YTD. We have reduced our exposure to them over the past few months, and our bonds are now sitting in something close to a money market fund to reduce risk.
The Canadian stock market does, however, continue to perform better than most global markets due to its heavier weighting of Commodities such as oil and gas, resources, etc. Though we tend to focus on U.S. markets simply because the Canadian market is much smaller in comparison, we are fortunately overweighted in both commodities and cash which are helping our portfolios year to date. The only problem with that, as we have discussed for the past few months, is that together with inflation and rising rates, it is a sign that we may be coming to the end of these long and also inflated bull (up) stock markets.
Inflation is now running rampant – we have all seen it at the grocery store and the gas pumps. Many now fear we are entering a period of what is known as stagflation, a persistently high inflation combined with high unemployment and stagnant demand in a country's economy.  In attempt to quell inflation, the U.S. Fed raised rates another ½% as expected on Wednesday, as did the Canadian Central Bank last week. Most of the banks around the world are following suit. The US FOMC has also confirmed they will begin pulling all the stimulus (at a rate of $95 Billion / month) that they had used to try to spur on the economy since the bottom in 2009. Other central banks have begun to do the same. See the following from BMO Economics:
As was widely expected, the Fed hiked rates by 50 bps for the first time in two decades amid inflation running at 40-year highs. The central bank also announced plans to start shrinking its massive balance sheet beginning June 1. But the relief rally came after Chair Powell signaled that a mega-sized move of 75 bps isn’t “actively” being considered. As our Sal Guatieri noted: “The Fed knows it needs to get policy rates to neutral levels (between 2% and 3%) as fast as possible without roiling markets. Look for another 50 pointer on June 15, with a possible pivot back to quarter point moves if inflation begins to rollover as expected.” Read on
Although we are pleased to see the central banks around the world finally positioning themselves to take on inflation, our concern is that they may have waited too long – and more importantly, they have not had a good track record of doing so without leading to a recession. Raising rates and reducing the stimulus, as we mentioned last month, is like hitting the economy over the head with two hammers – they will have to be careful and nimble, which is not an easy line to walk.
The war in Ukraine is still ongoing. Many now fear that the longer it goes, a new cold war will arise and pit China against the West. Wars typically create volatility, but do not affect the markets longer term. This may be changing, and we will keep an eye on this evolving situation.
And at last, the positives:
This newsletter may sound rather negative until now, but that is because there are strong and looming "potential" concerns. On the upside, however, are five very important points:
  1. The market, as of writing, is NOT in what would be considered a breakdown in BEAR territory. The broad US market is still above the lows of February 24th - a line we are watching closely.
  2. Interest rates, while rising, are still historically on the low side and stand to benefit borrowers - personal, corporate, and government.
  3. Inflation may be running hot, but it also shows that the economy is expansive and positive for company earnings and growth, and hence for the stock market.
  4. The Feds of the world will soon begin reducing the stimulus and money supply in the system. This is only just beginning as there is a lot of money in the system which will take time to reduce. This too will potentially continue to be expansionary and stimulative for the economy and markets.
  5. And most importantly: We do not subscribe to "buy and hold". Instead, you have a plan. It is a disciplined investment strategy designed to protect the portfolios that is ready to go on the defence to cash, should markets break down. For our portfolios and our clients, we consider that our "sleep at night" factor.
Bottom Line: We are in the Yellow Zone. This has us adding to the stronger asset classes of commodities and cash. We will not go to all cash until we enter the red zone in our stoplight. This market has yet to break through its bottom of February, which is our first major line in the sand. Until then, this market can reverse up any time, especially if the Feds around the world are successful in their fight.
In either case, we are pleased with our current holdings and consider ourselves well positioned in the portfolios for upside and are ready for protection as needed.
Should you have any questions or concerns regarding the market and/or your portfolios, and/or consider it may be an appropriate time to review your wealth plans, please contact us at any time. We are happy to provide options of phone, video, or in-person meetings.

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