It's been a tumultuous year!
The stock markets are down anywhere from 10-26%. Inflation is sky-high. Interest rates are climbing and talks of a recession are on the horizon. There have been few places to hide and the message is to wait out the storm. The obvious question is: how long will this last?
There's a best-case scenario and there's a worst-case scenario.
The worst-case scenario is that this current environment with high inflation, and stock market bear, drags on for several years as it did in the 1970s or 1980s. Back then interest rates increased to 20% to try and combat inflation. The world's economies are more synchronized today than they were back then, so it's unlikely that we have a repeat of those times. Much of the headlines will shock you into believing we are headed in that direction, but that is intended to lure you in and keep you at the media trough.
The best case scenario.
Central banks will continue to raise the key lending rates, while at the same time continue with qualitative tightening until the economy slows and inflation returns to the 2% target. A recession will invariably ensue. How bad, is anyone's guess? There's a whole lot of wait-and-see happening. What's likely to happen, according to Manulife's investment strategists, Macon Nia and Kevin Headland, is the stock market will bottom, yields will top out as interest rates increase, a recession will ensue, yields will drop on treasuries, interest rates will stabilize and have to start coming down to stir economic activity, and a new bull market will ensue.
Typically, they said, the stock market will bottom a few months before a recession is officially declared. A recession in the US and Canada will most likely start in Q1 of 2023 and last 4-6 quarters. If that is the case, then the stock market will likely bottom in the Fall, or maybe it already has.
A recession in Europe will start sooner, be more severe, and likely last longer. - mainly due to the ongoing energy crisis. The downside for stocks in the near term is that they go a little lower, but when a new bull market emerges we could see 8-10%/year returns on stocks and a bull market last for 5-8 years. Keep in mind, that when it comes to these events - there is a beginning, a middle, and an end. A silver lining may be that the worst is behind us.
They reiterate that you need to own large quality companies that pay dividends and that can withstand a recession. There's a flight to quality. In this regard, value stocks will outperform growth stocks.
Where to put new money?
USA, Canada, and then International.
How to allocate your current investments?
There's no immediate need to do anything if you have a good selection of quality companies within your portfolio that are diversified across several sectors and geographies. However, if you have some duds, this is a good time to do some tax-loss harvesting and then reposition your portfolio for future growth. Don't start making sweeping changes for the sake of feeling like you need to do something.
What about bonds?
At some point in the near future, we will see bond yields peak and then start to fall. As yields start to fall, bond values will increase. The 60/40 portfolio has been beaten up pretty badly in 2022 - to the tune of being down about 12%, however, bonds will have a resurgence as we go through a recession because interest will come down to jumpstart the economy.
No one has a crystal ball and anything is possible.
As you look down the road, you have to think in terms of probabilities. What is the most probable outcome? You have to be prepared for the worst, but also hopeful for the best. Some blend of several possibilities will likely emerge in the coming months.
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Fee-Only Retirement Income, Investment, & Tax Planning,
Willis Langford BA, MA, CFP
Nancy Langford CRS
