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Market dynamics are shifting. Conflicting signals are everywhere. But we shouldn’t be surprised by this. Contradictory trends are typical during investment leadership changes as the markets attempt to find new footing.
Even more, rather than marking a point of departure, the latest action extends a long narrative: the post-Covid cycle has been fundamentally different than all other recent cycles. The pandemic effectively broke every previously reliable economic forecasting indicator. And it continues to do so (take your pick from recession indicators that proved to be head fakes: Fed hikes; inverted yield curves; manufacturing downturns; regional bank implosions; and now, perhaps, the Sahm rule). Textbook macro analysis remains in a bear market.
Geopolitics are also adding to the angst. The weaponization of the dollar following the outbreak of war in Ukraine has quickened moves in many countries, most importantly China, to avoid U.S. Treasuries and buy gold as a hedge against America’s financial might. Markets are also having to digest polls in several nations. Even just the elections in the U.K., France and the U.S. account for a third of global output – and almost 80% of the MSCI World Index.
As always, America is hogging the political headlines. The run-up to the November election has been dramatic even by the America’s lofty standards, with Biden’s last-minute withdrawal, multiple assassination attempts against Trump, and polls signaling a very close contest. The political priorities of both parties remain somewhat opaque, adding to the challenges financial markets face in assessing and pricing government policy risk.
No wonder investors are confused. Looking back over the last 18 months, the most dominant trend for asset allocators has been the rush into the perceived safety of cash, bonds, and the largest technology stocks, signaling extreme risk aversion. This was never a healthy market dynamic.
But could a market rotation, or what we have called a “broadening bull market,” finally be underway? The initiation of a Fed rate cutting cycle and meaningful monetary and fiscal stimulus in China (at long last) could prove to be the catalyst that propels this shift in earnest.
Our thesis remains straightforward: Many non-tech asset classes are poised for solid long-term returns. Our investment team has continued to orient clients to this thesis simply because the broader global economy does not face the same credit conditions that led to the large contraction in 2000-2002 (corporations stretched) or 2008 (consumers stretched). In other words, contrary to the continual recession drumbeat, the cyclical upswing out of the pandemic is still in play.
Here’s our current outlook on selected asset classes.
Continued rate cuts from the Bank of Canada have reduced the attractiveness of holding cash. However, cash remains a viable portfolio hedge against equity risk, particularly as long-term bonds have an unfavourable risk/reward profile.
Our aversion towards developed market bonds remains, as we expect resilient growth and inflation to put upwards pressure on longer-term bond yields. This vulnerability was exacerbated with bond yields grinding lower last quarter.
Corporate bonds in most markets are trading on tight spreads (relative to history) versus government bonds. However, spreads should be supported by solid economic underpinnings, improving liquidity conditions and a likely boost to risk appetite.
The initiation of the Fed rate cutting cycle and meaningful monetary and fiscal stimulus in China should provide a boost to growth and investor sentiment. We expect the equity rally to broaden out across countries and sectors, supported by improving corporate earnings.
Fed rate cuts may be doubly-beneficial for gold miners, lowering the opportunity cost of owning gold and loosening corporate financial conditions simultaneously. Relatively sticky inflation and the potential for downwards pressure on the trade-weighted U.S. dollar would be a positive environment for gold prices.
Please visit our website for more detail on our fourth-quarter rebalance summary.
David Kletz, CFA, is Lead Portfolio Manager at Forstrong Global Asset Management. This article first appeared in Forstrong’s Insights Blog. Used with permission. You can reach David by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at dkletz@forstrong.com.
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The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.
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