Market Update June 2022
Hope you are almost ready for summer! With all the changes in the markets recently, we think it is a perfect time for a market update.
The old trope “stuck between a rock and a hard place” seems appropriate given that we now find ourselves stuck between inflation and interest rates.
Inflation is the cost of everything. For those that have been to the grocery store or the gas station, the cost of goods is going up. Typically, when this happens the central banks of the world start to increase interest rates. This seems to be a required law of finance.
We have spoken with our clients often about the “teeter-totter” effect when it comes to the relationship between interest rates and the value of any asset. This is where interest rates are on one side and asset values on the other. When the side of the teeter-totter that has interest rates goes up, the side with asset values goes down.
So, this means when inflation goes up and stays up, interest rates go up, leading to a drop in asset values. And by assets, we mean all of them; stocks, bonds (safe and less safe), real estate, cryptocurrencies etc. This is the rock.
Now to the hard place. Many of our clients are living off of their investments and the income they provide. It’s important to stay invested to achieve this goal and receive dividends and interest from these investments. Also, we need to somehow keep up with those increasing expenses.
Given that this has been our developing reality, what have we done to ensure we can meet the goals of our client portfolios?
First, we have been reducing the most volatile portions of our stock portfolios, particularly investments in the US and in Europe. Many of the companies that make up the US and European stock indices are going to be hit hardest by rising interest rates. Those have been sold first. We have kept our Canadian investments as our economy should perform better and they provide good income in the form of dividends. Canada sells what the world needs - commodities.
Second, with the cash raised from selling stocks we have invested in 1-2 year corporate bonds paying around 3.5%. We have done this rather than keep cash that only pays about 1%. These are better than investing in GIC’s as we can sell the corporate bonds at any time. They are not locked-in and should be impacted very little by rising rates.
Third, and finally, we have been adding investments to the portfolio that are principal protected or go up in value as interest rates go up.
We continue to and will always stick to the three pillars of our investing style:
Protect what you have
Invest for income
Reasonable rate of growth
We know we harp on this in every note we send:
Do not pay attention to the media. Their job is to sell fear and urgency for ratings. Please remember, they are reporting in the markets - NOT your portfolio.
We wish you the best for a very lovely summer.