A portfolio of 60% equities and 40% fixed income [GICs, bonds, other interest-bearing vehicles] has been the bedrock of investing for decades. Fixed income positions have traditionally moderated portfolio volatility, earned income and often performed well during market downturns. Then comes 2022 when the fixed income portion of the 60/40 portfolio dropped double digits instead of moderating portfolio volatility. As of October 4, the S&P Canada Aggregate Bond Index is down 10.90% YTD. How did this happen?
The culprit is significant interest rate hikes initiated by central banks to fight inflation. Although it seems counterintuitive, rising interest rates generally result in lower fixed-income prices.
At the time of writing, at least two more interest rate hikes are being predicted in Canada. So what should investors who own fixed incomes do?
Those of you who watched our webinar last May with IPC Chief Investment Strategist Rana Chauhan heard him predict that inflation should start to cool around the end of the summer or early fall. That seems to be what has happened as inflation dropped during both July and August in Canada.
The good news is that higher interest rates mean lower fixed income values, but the opposite is also true. When interest rates drop, fixed income values generally rise, and that’s good for your portfolio. Even if interest rates just leveled off and remained steady, fixed incomes will perform significantly better as the yields on these bonds have improved significantly over the last year. Short-duration bonds (ave. 1.8 years) are now yielding just under 5% vs. next to nothing 18 months ago. Investors are now actually earning a real income from their bond positions.
If inflation continues to drop (no guarantees) and if world economies slowdown, this will allow central banks to minimize and at some point, cease future rate increases and possibly lower rates next year.
At our national conference, I recently listened to fixed income specialist Konstantin Boehmer from Mackenzie Investments. His view is that “now is the time to buy Canadian fixed income because yields are at multiyear highs and since prices have adjusted downward investors are getting better value for the bonds they purchase.”
Big picture ideas on the markets
2022 has been the most challenging since 2008 for investors. According to the October Globe and Mail, a recent survey found that almost one-quarter of Canadian investors had no confidence in the stock market and planned to “cash out” by the end of the year.
A few investors I’ve spoken to tell me they are concerned after hearing an investment “guru” predict s disaster in the markets. My research on numerous gurus’ past predictions has taught me that making investment decisions based on these is one of the worst mistakes an investor can make. Selling into a falling market locks in losses that, up to that point, exist only on paper. And it sets up the challenging task of trying to time the market rally once conditions improve.
“Reducing market exposure through ill-conceived selling – and thus failing to participate fully in the markets’ positive long-term trend – is a cardinal sin in investing,” Howard Marks, the billionaire co-founder of credit fund Oaktree Capital Management, wrote in a recent installment of his widely followed newsletter.
An investor, by definition, to look long-term while basing decisions based on short-term volatility is just speculation. Like many things in life, looking long-term is simple, but it’s not necessarily easy. We are bombarded daily in the media with daily doom and gloom. Yet if we look at past times of severe world events, we see that once those serious events end, [and they have always ended] equity markets have bounced back in a big way. I have no reason to assume that the same will not happen this time. We just don’t know when.
The chart below shows how markets have responded historically after significant downturns.
As usual, we are here for you, to help act as your steward to these especially challenging and scary times.
Congratulations is in Order
Recently my Associate Advisor (and son) William Barreca earned the prestigious designation of Certified Financial Planner (CFP). The designation takes a few years to undertake and involves a grueling six-hour examination which many do not pass. Congratulations William, great job.
Youth Without Shelter
Your West End Wealth planning team recently donated a dinner of cheeseburgers, potato salad, coleslaw and caesar salad for residents at the shelter. Paul was behind the grill being the short order cook while Vikki and William took care of everything else.
It was a fun experience to help out such a great cause. While serving dinner, one could not help but looking into the eyes of the residents and see the hard life that many had (and are still) going through.
Vikki, William, and Paul serving it up at YWS
*The views and opinions expressed in this article may not necessarily reflect those of IPC Securities Corporation.