Stock markets have done very little this past month given concerns about rising rates, inflation, and failures by some of the smaller banks. And by little, we mean they have bounced back and forth in the same range going all the way back to the end of March, where markets are now at about the same level as they were then. It is the same for currency; US Dollar versus Canadian dollar and other currencies. As we mentioned in the last e:Newsletter, it is all about the USD. If USD is rising, then investors are flocking to it as a safe haven. If it is dropping, then investors are comfortable with risk and buying stocks.
That said, most importantly, stocks have not broken down this past month given concerns for inflation and more news on bank failures as we saw in March. A market that does not drop on bad news is a resilient, even strong market. For this reason, we remain in the Green Zone longer term, and Yellow zone short to mid term. It is that shorter term that has us holding some cash and gold for defensive purposes as there is still a potential for negative catalysts. We would rather miss some upside than catch more downside should markets break down.
The U.S. Fed, the central bank came out and raised rates another quarter percent on Wednesday. In their commentary that followed, they indicated that they would likely go on a pause for further increases from here. Markets liked that. What they did not like and proceeded to pull back later that day and the following day, was that while the Fed did leave the door open to a pause at its next meeting, the statement was noncommittal overall. They advised that they are prepared to step in and deal with any emergencies that may flare up. So what sort of emergencies?
It will be dependent on the inflation and economic numbers going forward. Even though rates have climbed significantly, inflation has remained quite “sticky”. Inflation has slowed but is still rising or going sideways. Unless the numbers begin to show rates and reduction in money supply (reverse of the stimulus) are having a reducing effect on inflation, we could see the Fed, like other central banks around the world, continue to raise rates. Generally, that would be a negative for stocks and economic growth. This possible negative outcome could mean a recession, if we are not in one already. And then the question will be, is it a hard landing, or a lighter recession; soft landing and shorter in duration.
I am writing here on Thursday afternoon, but tomorrow; Friday, we will receive the very important US Nonfarm Payrolls and in Canada the employment reports, as well as wage inflation reports. They could be triggers to finally move us up or down, out of the malaise these markets have been in. It is for this reason we raised a little bit more cash yesterday, to take some risk off the table. Should further reports and indicators show we are going into a recession, it will further deter investors to remain in the markets. Should the reports prove positive for stocks, we will look to get fully invested – and from there it will be incumbent on us, to ensure we are in the relatively stronger sectors and stocks. We are ready to execute the trades in either direction. Should the reports prove to be inconclusive, we will sit tight with the positions we currently own and are pleased to be owning.
Surprisingly, outside of gold and cash, the majority of what we currently hold in the portfolios are the more growth and tech related stocks. If interest rates are stalling out, or even beginning to decline as some believe they may do, then it is the growth companies that tend to benefit more than other sectors. It is the same reason they got hit hardest last year on fears of rising interest rates, and now to positive moves on likelihood of rates holding or dropping.
We are at a crucial juncture for markets right now. From both a technical stance where markets have been going sideways for quite some time, and also from a fundamental point of view, where the news is mixed. This creates a lot of uncertainty and confusion for investors, which breeds volatility. Thus, we are focusing on the fact that we are in the Yellow Zone in our shorter term signals and therefore somewhat cautious and defensive. The fact that our longer term signals are still in the Green Zone reaffirms our bias to being invested and still gives us a positive outlook for markets going forward.