Rate hikes and how to prepare your portfolio for 2023 on the Sunday Reads.

In Canada, the headlines and airwaves were focused on the Bank of Canada and their rate hike decision. As you likely know, the BoC increased rates by 50 basis points or 0.50%. Many were expecting a 25 bps hike, but recent GDP growth put a nail in that coffin. In the U.S., good news was still bad news and then even bad news became bad news. The economy and employment is still holding up “too much” but CEOs and other readings are warning of a pending recession. The markets have started to focus on what level of economic weakness might arrive thanks to the rate hike cycle. Do we get a mild or painful recession? Is there a chance of a soft landing? This Sunday, we’re looking at rate hikes and how to prepare your portfolio.

I was back again this week making sense of the markets on MoneySense. The lead story was the rate hike in Canada and the potential ramifications.

Here’s the rate-hike history for 2022

The rate is now at its highest level since 2008.

1.0%: up 50 bps on April 13
1.5%: up 50 bps on June 1
2.5%: up 100 bps on July 13
3.25%: up 75 bps on September 7
3.75%: up 50 bps on October 26
4.25%: up 50 bps on December 7

This is from the BoC statement:

“Looking ahead, the Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”

There is a hint of dovishness in that comment. Previous comments suggested further rate hikes were almost certainly on the way. The door has been opened to the possibility that we might have a rate hike hiatus, a hope that was driving markets higher in October and November.

Stock markets have started to fall from the beginning of December. The focus has turned away from any rate hike hiatus or pivot towards the economic softness or damage created by the rate hike cycles in North America and around the globe. In that MoneySense column you’ll see that CEO’s started to use the “R” word with regularity. Yes, that’s R for recession. That said, it might be the most advertised and expected recession in history. We don’t know what we will get, but no one should be surprised if and when an actual recession is reported.

Do we still call it a Russcession?

It wasn’t the first time that I used the R word, but in March of this year I suggested that the Russcession is coming. Inflation was brewing, and the tragic invasion of Ukraine made things much worse. That certainly played out. In that blog post John Mauldin suggested the possibility of stagflation. At the very least it would be wise to put some dedicated inflation protection in the portfolio. That is a common theme on Cut The Crap Investing, and inflation-friendly assets were put on the table long before that Russcession post.

From early 2021 an investor with assets such as the Purpose Real Asset ETF (PRA.TO) and oil and gas stocks (XEG.TO) have seen wonderful returns from those holdings. Our portfolios are holding up more than well. Investors will all-weather portfolios have benefitted greatly by being ready for inflation. Of course, they’re mostly ready for anything. Inflation fears could be replaced by other economic scenarios.

Building the energy dividend portfolio.

This week, Mark at My Own Advisor was also dusting off the R word with –

The worldwide recession is coming weekend reads edition.

How to prepare for 2023

On Seeking Alpha, I rounded up a crew of experts, added my own thoughts and penned – How to prepare your portfolio for 2023.

The “idea” is quite simple. What has worked in in 2021 and more so in 2022, might continue to work in 2023. And the investment approach is quite timeless and universal – own good companies that make a lot of money. Cash in hand (portfolio income) might also continue to be very important in 2023, especially for retirees.

Also, if we do get a recession, bonds and cash might be your best friend again. Yes, we’re back to a well-balanced portfolio. On a Wealth of Common Sense –

What is the bond market saying about the economy. From that post …

This is not normal and it’s why many people think the bond market is screaming recession in a crowded theater.

Retirees and near-retirees might also pay attention to all sector arrangement, the cornerstone of the all-weather approach.

As always, patience and consistency is key. This might be the best quote from the world’s greatest investor.

The stock market is a device to transfer money from the impatient to the patient
Warren Buffett

The U.S. dollar decline

Lance Roberts (no relation) comments on the declining U.S. dollar and feels there is more to come. And he asks, will a dollar decline be good for stocks? Lance echoes a theme put on the table by a few experts in that Seeking Alpha post – bonds in the first half of 2023 with a stock recovery in the second half of 2023. Of course, that is a simple and classic rebalancing opportunity. That kind of rebalancing happens in the managed asset allocation ETFs.

As stated, the dollar decline will likely not be “initially” bullish for stocks. It will likely be more favorable for bonds as the market reprices for slower economic growth, recession, or some credit-related event. However, once that repricing is complete, the dollar decline will become a tailwind for corporate revenues and commodity-related sales.

Also you may have noticed your gold holdings perking up recently. When the U.S. dollar starts to lose its value, investors look for alternative investment sources to store value. Gold is an alternative. Another argument for the all-weather models that will often include gold. I hold a modest amount of gold and gold stocks.

Of course the value of our (for Canadians) U.S. stocks will go down in value based on the currency. Canadians may decide to hold currency hedged ETFs or have a look at the CDRs available from our friends at the Neo Exchange.

For now I’m continuing to hold our U.S. stocks in U.S. dollar accounts (no hedge).

CDRs relating to some of the largest US companies listed on NYSE and NASDAQ are now trading in Canadian Dollars.
Flexibility of investment through fractional ownership of US stocks.
Your exposure to US Dollar currency risk is minimized through built-in currency hedging, allowing you to own the company, not the currency.

And while we’re on the hunt for opinions on the economy we’ll certainly need to read Mauldin – Recession Scale. That’s a very good read as always.

The Fed entered this year behind the curve and shouldn’t end it by proclaiming victory—which is how many will interpret a 50-point hike. Stopping inflation must remain top priority. The evidence I see doesn’t show any need to slow the pace, and I hope they don’t. We can talk about pausing in the second quarter. (Note: That’s pausing and not pivoting. Those who think the Fed will cut rates soon are engaged in wishful thinking.)

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