With the strains of 'Auld Lang Syne' still ringing in our ears, we find ourselves here in a New Year and Brave New World. In my year-end blog I wrote about needing an Ouija board to figure out where the economy and stock markets are going in 2017. And, though the crystal ball is still pretty cloudy for the most part, it doesn't take much sorcery to look hard at the fundamentals of both and come to this conclusion: This is the longest expansionary period in history without a recession and the longest bull market without a correction. Yes interest rates are still low, yes inflation is still low (though there has been signs of inflationary pressures building), yes the US just elected a pro-business President-elect (Donald Trump for anyone living in a cave for the past 2 months) who promises to Make America Great Again (read "rich" again), cycles are cycles and must at some point reverse course.
Our position is not bearish in entirety, there are promising signs of a more sustainable economic outlook medium term, but the longer we go without a recession and the higher the markets go without a correction, the higher the probability of either or both happening. 'Reversion-to-the-mean' is the statistical reality that over time, prices and returns eventually move back towards the mean or average. We are at the limits of those averages and the next move is more likely in the other direction.
So what does this mean for your portfolio? Well, for starters we remain defensively positioned with a significant bond fund weighting. Second, we are increasing exposure to inflation-indexed bond and US equity funds. Both moves should capitalize on any upside that occurs before markets pause and start to move the other way. Overall, we are confident in our asset allocation, which emphasizes capital protection and modest returns through yield and capital gains. Last year at this time, equities were selling off starting the year with a major market correction.
Our portfolios weathered this period well, avoiding most of the market downside. We are confident they are well positioned to do so again.
For additional reading, I've included two articles for your review. The first supports our position and provide good context. The other is about our beloved Loonie and how it did in 2016. As always, I welcome any feedback on my weekly blog.
Please call or email me at any time.
Happy New Year!