It was a crazy week in the markets. South of the border the Fed took the stage and ‘shocked’ the markets (actually the move was leaked) with a 75 basis point rate hike. The markets initially liked the big move. Finally, the Fed will get serious about inflation. But then market makers changed their mind and reversed direction. Oh no, a serious Fed Chair means a likely recession. U.S. stocks finished down 3.5% for the week. We’re looking at bond bulls and stock bears and more, on the Sunday Reads. Grab your coffee and enjoy. And happy Father’s Day.
Fed success is good news for bonds?
Let’s look to the other side of rate increases. If the central bankers are successful, if they accomplish their task, they are setting up a bull run for bonds. I had put this notion in previous posts.
Here’s some bits from a Globe &Mail piece (paywall).
As bond yields decline, bond prices rise – and it’s not outlandish to bet that this will happen. Inflation and central bank rate hikes appear to be largely priced into bonds already. But the risk ofslowing economic activity, if not an outright recession, is not.
David Kletz, a portfolio manager at Forstrong Global Asset Management
He believes that if there is a recession within the next two years and the yield on the 10-year U.S. Treasury bond falls back to 1.5 per cent, anyone buying a bond today will see investment gains of 17 to 23 per cent.
Michael Contopoulos, director of fixed income at New York-based Richard Bernstein Advisors
That said, if central bankers fail and we get stagflation, then you want dedicated inflation fighters such as real assets and energy stocks.
With so many swirling risks and potential outcomes we can see the merits if an all-weather new balanced portfolio.
The traditional 60/40 stock and bond balanced portfolio might also rise from the dead.
What if the correction follows market history
This was interesting, from a Scott Barlow market piece.
The S&P 500 entered a bear market on June 13, the 20th bear market in the past 140 years; average peak to trough bear decline = 37.3%, average duration 289 days; history is no guide to future performance but if it were, today’s bear market would end on Oct 19, 2022 (35-year anniversary of Black Monday) with S&P 500 at 3000.
And here is the history of Canadian market bull and bears. Markets mostly go up. But at times we need to wait out the corrections and bears. I know it’s not easy, but keep that in mind. And of course, the in accumulation stage we should be adding, taking advantage of lower prices.
Recession or stagflation?
This week I had suggested that the economic offering might be a ‘choice’ between a recession or stagflation. That might not sound rosy, but a recession is certainly a better option compared to stagflation.
It was interesting to read the same opinion from John Mauldin. Of course, Mr. Mauldin offers much more context, has better analogies, and adds more concrete support. He’s just better ‘at it’. It’s a must read.
From that post …
The Fed will move either a) too fast and spark a deep recession, or b) too slow and let inflation get much worse. (There’s a theoretical chance the Fed finds a perfect path in between, but I don’t know anyone who seriously expects it.) That means we are heading somewhere unpleasant; the only question is what kind of unpleasantry we’ll get.
This past week Jay Powell in the U.S. raised rates by 75 basis points. But apparently that’s chump inflation-fighting change compared to the 70s’ and early 80’s.
Note those near-vertical lines. These 50‒75 basis point moves people now consider “aggressive” are mild in comparison. The Volcker Fed had multiple hikes of 100 bps or more. Volcker rewarded Jimmy Carter’s appointment by giving him an immediate recession going into 1980. Then they took fed funds 1,000 points higher in the second half of 1980, helping cost Carter the election and welcoming Ronald Reagan with an even deeper recession.
Mr. Mauldin offers that Powell is on the weak gradualism (rate increases) stagflation-enabling path. Another key point from the post is that energy costs are likely not coming down until demand is ‘subdued’ in a meaningful way. Currently oil and gas demand is increasing and production has been mostly flat for quite some time.
Douglas Porter, the chief economist at BMO agrees.
To get inflation down quickly. It would really help if oil prices broke,” he said. “But unfortunately, that doesn’t look like it’s about to happen.
Here’s the present and the past of inflation on A Wealth of Common Sense.
Energy stocks are taking it on the chin
Given the recent action in the commodities and energy space, I like my timing on moving to the Canadian energy dividend portfolio idea. In mid May I sold my ETFs (XEG) and (NNRG) with wonderful capital gains and moved to an energy dividend focus. The idea was to remove the stock price risk, and replace that risk with dividend health risk.
I am still a big fan of the oil and gas space (and core energy indices), but XEG is down about 18% from its recent peak of 10 days ago.
I also took profits to cover our driving needs for a year to two. We are now travelling down east and our gas is ‘free’.
Not advice, but I think that any weakness in the energy space is a wonderful long term investment opportunity. We know the global energy setting. Any economic weakness or recession will simply be a pause.
Today-self and tomorrow-self
On My Own Advisor Mark offers the Weekend Reads with the today-self and tomorrow-self edition.
On The Hub a case study: is Pamela going to be OK when she retires? That post from Ian Moyer of Cascade Financial runs retirement simulations seeking the most optimal order of asset harvesting for creating lasting retirement income.
That’s an interesting post. And as I suggested in the following retirement video, retirees should seek help, such as an advice-only planner, or you can access these types of tools.
You might check in with Mark and Joe at Cashflows & Portfolios. They run these types of models for you, helping self-directed investors fine tune their retirement strategy. If you go that route, be sure to tell them Cut The Crap Investing sent ya.
On The Hub, you might also check out Greed, Fear and Amnesia: The Importance of Cycles.
On Tawcan, Bob provides his dividend and portfolio update for May.
Bob has demonstrated great success in building wealth and building the dividend income stream. He and his wife have a very aggressive savings rate, and Bob reinvests on a regular schedule. He embraces any lower stock prices (and bigger dividends that are available). It’s a very solid portfolio as well that offers growth and income.
And here’s the portfolio update from Rob at Passive Canadian Income. Rob is also embracing some lower prices. He’s looking to build larger positions in companies such as Microsoft.
Hello Beat The TSX
On Seeking Alpha this week, I introduced U.S. readers to the Beat The TSX Portfolio. The high dividend strategy is having a very strong 2022.
On The Retirement Manifesto, Fritz offers the four paths to retirement.
Fritz recently read Longevity and the New Journey of Retirement, a fascinating study conducted by Edward Jones and Age Wave Study. He encourages us to read it in its entirety. What path will you take in retirement?
You’ll find a nice mix of reads and podcasts on The Irrelevant Investor – These are the goods.
Telus connects with LifeWorks
What an interesting telco company. I’m happy to hold.
On stocktrades.ca, Mathieu offers 6 Canadian REITs to consider.
U.S. readers will like this look at the 3-fund portfolios in various account types.
And last but not least, Kyle offered this spirited effort at MoneySense, making sense of the week and the markets.
We are travelling down east
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