There is no avoiding the crisis and tragedy of the Israel-Hamas war. While nothing can begin to match the humanitarian concerns, we will address the financial, economic and global risks. Preparing for war is preparing for risk and uncertainty whether that be a humanitarian crisis or a financial calamity. The risks and events can commingle and merge together as well. In the past this blog has looked at the global war on COVID-19, the invasion of and ongoing war in Ukraine and now the war in the Middle East. To no surprise the risk management answers are quite similar.
It was last Saturday that we woke up to the tragedy in Israel. A declaration of war soon followed. The potential of escalation and economic shocks is real. Of course we pray for the most peaceful outcome as is possible. On this Sunday, that peace appears to be a distant hope.
While stock markets mostly took the events in stride, risk-off assets certainly did respond. Gold, bonds and energy moved higher.
The memory of oil shocks
A headline on Seeking Alpha offered that – Oil prices rise as investors fear a wider war with Israel’s advance into Gaza. From that post …
Energy stocks enjoyed their best week since June, with the S&P 500 Energy Index +4.5%, as oil prices surged ahead of Israel’s imminent advance into Gaza that could cause violence to spill over into other parts of the Middle East, potentially causing disruptions to oil production and shipments.
And this is surprising, from that same Seeking Alpha post …
A less publicized factor also affected oil prices: The Biden administration for the first time began enforcing Russian oil sanctions announced last year, penalizing two tankers for carrying Russian crude oil above the West’s $60/bbl price cap.
Oil is up over 7%, while gold is up 5.5% over the last several days. Don’t forget to rebalance when risk off assets move in violent fashion. We can see how gold moved up considerably in 2020 with the invason of Ukraine. It then settled into a range as the world ‘got used’ to the ongoing conflict. Gold price …
Of course, no one knows how events in the Middle East will evolve, and how far the conflict might spread around the globe. Let’s not forget that it was the oil shock that ignited the stagflation period of the 1970’s.
The Purpose Real Asset ETF PRA/TSX is up 2.5% over the week.
Even bonds caught a bid as a defensive asset with the Canadian bond market (XBB/TSX) up 1.6% and longer term U.S. treasuries up 2.5%.
Defense stocks for defense
And it should be no surprise that defense stocks are on the move as the world powers militarize to face the mounting threats in the Middle East, Europe and Asia. Northrop Grumman Corporation (NOC/NYSE) is up over 14% over the last several days and Raytheon (RTX/NYSE) is up over 6%. We hold Raytheon in one account. It was a spin-off from United Technologies.
Ray Dalio attracted some attention this past week suggesting that there is a 50% chance of a world war. I always have time for Dalio, his understanding of credit and financial, economic and political cycles is worth consideration.
Of course, predicting the timing of these ‘large’ events is more than difficult. But we can see the order in which they evolve.
And once again the strategies for managing most risks follow a few of the same principles. We can be ready for most anything with an all-weather portfolio approach.
In my opinion, the all-weather approach should be a consideration for retirees and near retirees. Those in the accumulation stage might stick to a well-diversified equity-heavy approach, while investing within their risk tolerance level. That said, I think some dedicated inflation-fighting assets is important for most every investor.
I like the idea of a mix of PRA/TSX and oil and gas stocks.
Of course, you will make up your own mind on that front.
The all-weather portfolio model has greatly outperformed from 2020.
After the rate hike pause
And here’s why the markets (perhaps) were looking to make a move as the central bankers in the U.S. tip that we might be at the end of the rate hike cycle.
If history repeats, we’d be in a period where stocks and bonds both perform well. But we see bonds (UST) outperforming stocks.
More Sunday Reads
We check in with Dividend Hawk for the week in review. Earnings season is starting to warm up south of the border. The big banks will soon lead the parade.
JPMorgan Chase was first out of the gate and demonstrated very strong growth year over year.
My Pepsi (PEP/NYSE) reported as did one of my two loser stocks in the U.S. – Walgreens (WBA/NYSE). From the Hawk post –
PEP reports Non-GAAP EPS of $2.25, beating analyst estimates by $0.10 and increased 16% year-over-year. Revenue of $23.45 billion was in line with analysts’ expectations, and increased by 6.7% compared to the same quarter last year. For fiscal year 2023, PEP now expects to deliver 13 percent core constant currency EPS growth (previously 12 percent). For fiscal year 2024, PEP expects to deliver results towards the upper end of long-term target ranges for both organic revenue and core constant currency EPS growth.
All said the stock is down over the last few weeks over the notion that Americans will consume less snack and sugary beverages thanks to weight loss (hunger suppressant) drugs such as Ozempic.
I’ve long suggested/complained that I wish I had taken Pepsi and Walmart (WMT/NYSE) to a 10% portfolio weight each, while they were at reasonable valuations.
At My Own Advisor Mark delivers the covered call edition. Canadians love their income, and I have no problem with a sprinkling of covered call ‘stuff’. That said, we should realize that we are giving up future gains for current income. It’s not a good idea for those in the accumulation stage, but retirees may take some comfort and may (potentially) be able to modestly lower sequence of returns risk.
Mistakes we’ve made a few
At Tawcan Bob offers his investment mistakes and failures. Of course, the first and biggest mistake Bob would admit to is the most common among Canadians …
Although I started investing early in my early 20s, I was buying mutual funds that bank financial advisers were recommending. I knew that minimizing Management Expense Ratio (MER) was a good idea but I’d often get persuaded by these “financial advisers” to go with actively managed funds. Simply because these funds had better historical returns.
There is no need for most Canadians to invest in high fee mutual funds. They almost always come attached to advisors with the total fee tab being above 2%. Those fees are an incredible wealth building barrier. Larry Bates the author Beat The Bank calls those fees wealther destroyers. I had the pleasure of lunching with Larry a few weeks ago, celebrating the fifth anniversary of his (still) best-selling book.
Bob also goes on to mention ‘not having a long term view’ and ‘chasing yield’ as other pivotal revelations.
We all make mistakes. Every investor goes on an educational journey and we don’t have to be perfect. Of course we’ll never be perfect. The important thing is to learn from any mistakes. My decades of investing and time as an investment advisor taught me that we can keep it very simple. We can be very passive whether we hold an ETF Portfolio or a portfolio of individual stocks.
These three words sum up where my personal educational journey has landed.
It took me decades to learn to do less, to get more. Our current portfolio was built about a decade ago as we prepared for retirement. I have not sold out of any stocks or ETFs. Though I have certainly executed some portfolio add-ons including the shoring up of inflation-fighting assets such as Canadian oil and gas stocks and bitcoin.
I shaded more to ultra short bonds over longer bonds as the yields on the short end became very attractive.
I do not touch the bulk of the assets.
On Findependence Hub a misleading retirement study?
They shed no light on whether retirees are spending reasonably. We know that there are retirees who spend too much, others that spend well, and those who spend too little. This study fails to tell us anything about the relative sizes of these three groups.
At Passive Canadian Income, Rob’s September portfolio report shows things are mostly moving in the right direction.
A few GICs ticker higher, with one lower at EQ Bank.
At Banker on Wheels they ask if your city is in a real estate bubble. I live in Toronto, so ya, big time. In fact it’s of the most bubblicious on the planet.
Included in the weekly mix of reads and podcasts …
You’ll find the live YouTube link in the Banker post.
The golden age of Roth conversions
For our American readers, the golden age of Roth conversions courtesy of Fritz at The Retirement Manifesto.
Still south of the border, FiPhysician looks to expectations in retirement.
In closing, in times when we are tempeted to think and worry too much …
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