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Portfolio Strategy

Strategies for a Smooth Flight Through Market Turbulence

Our View:

Recent developments over the past couple of weeks have been surprising, but not entirely unexpected. Let me explain. Over the past year we have written extensively about the imprecise impact of rate hikes on the economy, the lag-effect of these changes on the economy, and the uneven impacts these changes have on consumer and investor behavior, not to mention business activity.

We have also shared what typically occurs at the end of most interest rate hiking cycles –a recession, when something in the economy breaks and its typically the weakest link. But over and beyond all these factual observations, we also observed cracks emerge late last year following the rapid move in global interest rates – which, as a reminder rivals the tightening cycles of the 1970s and 1980s.

G7 Interest Rate Hiking Cycle Strongest Since the ‘70s.

This chart shows G7 Interest Rate Hiking Cycle Strongest Since the ‘70s.

For example, in October 2022, we had a brief scare across the pond when U.K. pension funds, which had more than £1 trillion invested in them, came under severe strain with a “large number” in danger of going bust. To their rescue came the Bank of England (BoE), as they should. The BoE stated that the dramatic rise in interest rates on long-dated U.K. government bonds in the days immediately after the chancellor’s (now the former chancellor’s) mini-budget had triggered a “self-reinforcing” spiral in debt markets, putting the stability of Britain’s financial system at risk.

Sound familiar? Umm, yes. We are seeing something very similar play out in the U.S. financials sector with U.S. regional banks, which in addition to facing large losses on their asset portfolios are battling a real liquidity challenge that, in our view, is far from over.

As the old adage goes, you only really know who is swimming naked when the tide goes out. So far, it has been U.K. pension funds and U.S. regional banks? In our opinion, the question is more about “who is next” rather than “if” others are skinny-dipping.

That said, while the Federal Reserve (Fed) has signaled that the end in the current tightening cycle is nearing the end, what concerns us more in particular as it relates to interest rates, is all the tightening that has occurred over the past 12 months – the Fed has a pretty strong track record of breaking things – i.e., causing recessions.

Finally, attached is a client-friendly presentation from our travels to Kelowna last week where we met with both advisors and their clients. The presentation can be a helpful tool to help better explain to clients the current market backdrop and some of the many certainties of investing, including:

  • It pays to stay invested. Avoid the temptations to time the market. It’s a losing proposition for even the smartest minds (e.g., Long-Term Capital Management).
  • Ignore the headlines/noise, and remember to “be fearful when others are greedy, and greedy when others are fearful” – Warren Buffett.
  • Stay rational when markets/investors appear to be behaving irrationally.
  • Ignore your emotional tendencies, and stick to your plan. Otherwise, you may end up buying high and selling low.
  • Volatility/market selloffs should be expected and are NORMAL even during broader bull market cycles!
  • Diversification + Asset Allocation = 🙂


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