Since the inaugural “Market Forces” piece published in January of this year, much of the focus of our commentary to date has been on our concerns over inflation, and heightened interest rate risks.
This is not due to any lifelong obsession over this subject, but rather our view that this factor is a critically important one in terms of financial market impact. Over time, we would expect the narrative to shift to other issues of importance we identify. For now, though, we continue to focus on this issue, as we believe it to be a key issue warranting focus. Not to belabour the point, but the April 2022 inflation data release earlier today had inflation come in above expectations at 8.3%.
The rate hiking cycle started officially in March of this year, and we have already seen the Fed hike interest rates twice totalling 75bp (¾ of a percent). Importantly though, market expectations of interest rate hikes have continually increased throughout the year, currently standing at 285bp (~3 percent).
The consequences of this rapid re-pricing of risk have been clear; both the NASDAQ and S&P 500 have seen double digit declines in calendar Q2 alone, and on a year-to-date basis are down 25% and 15% respectively.
Unsurprisingly, since the sell-off has been rates driven, bonds have not escaped unscathed; the yield on the 10-year US Treasury doubled in 2022 (~1.5% to ~3.0%) and 20- and 30-year US Treasuries also currently trade at 3% plus yields, at 3.26% and 3.05% respectively.
Market performance in context
The significant moves and volatility we are currently experiencing in financial markets is anything but pleasant for investors. In times like this, I believe it worthwhile to contextualise the role that risk assets play in a portfolio context. Or in other words to examine, why investors hold risk assets in the first place.
It’s easy to get caught up in the numbers, but taking a step back, the key big picture takeaway here is simply this; over time, equities have produced greater historic returns but with greater risk. From an investor’s perspective, bearing the ‘pain’ or ‘cost’ of volatility, is the price one ‘pays’ for a higher expected longer-term return.
To relate this back to the challenging period we are currently undergoing in the markets, it is important to understand that this volatility is a feature, not a bug, of equity markets.
Taking a big picture look at risk assets like equities is only half of the equation, we also need to look at the characteristics of the alternate, namely cash. The big picture here is simply this, investing in cash brings about a highly predictable return profile (i.e. very low volatility), but those expected returns are lower, and very importantly, below inflation.
This is a clear representation of the adage, “There is no such thing as a free lunch”.
Cash offers a high degree of certainty, but that certitude is a return that erodes the real value of assets, an issue even more notable given current elevated inflation levels.
One other key point to highlight is that, driven by an extended period of ‘free’ money (i.e. low interest rates) and the false sense of security engendered by continually rising stock prices, the past few years have seen fairly sizable pockets of extreme valuations develop in markets. These valuation excesses working their way through the system is a healthy process for markets.
Your McIver Capital Portfolio
In line with our articulated views over the past few months, the Investment Committee at McIver Capital Management has undertaken several actions to tilt client portfolios to a more defensive positioning. These included increasing the allocation to value versus growth factors (see “Market Forces 004” ), as well as a significant number of actions on an individual security basis (see “Market Forces 003“).
As a client, you will receive a more comprehensive note in the coming weeks detailing the actions taken in the annual rebalance, including specifics relating to individual security positions. Broadly speaking these movements included a particularly high degree of scrutiny at an individual security level of any high valuation stocks in the portfolios, as well as the addition of several high conviction names (resilient business models that generate significant cash flows, and trade at attractive valuations).
In light of the sell-off to date, and whilst acknowledging the short-term nature of the evaluation period, the actions have added value to clients and are evidenced in the performance figures of the portfolios (see below).
The McIver Capital Management playbook to create value for clients remains the same; a foundation of disciplined asset allocation complemented by rigorous stock selection. In markets such as these, we believe the latter has an increasingly important role to play, and we are dedicating increased efforts in this regard.
On behalf of McIver Capital Management
P.S. Whilst the key metric of focus at McIver Capital is on delivering value to our clients, it would be remiss of me not to congratulate McIver Capital on the recognition of the team principal, Neil McIver, as one of Canada’s top Wealth Advisors by two publications.
These awards, bestowed on an annual basis, recognize an Investment Advisor who leads our industry across a multitude of factors including client service and best practices, industry expertise and growth. Neil was chosen as one of the top 150 Advisors in Canada for 2021 by Globe & Mail’s Report on Business and SHOOK Research. He was more recently chosen as one of the top 50 Advisors for 2022 by Wealth Professional Magazine.
Your Model Performance (net-to-client, third-party audited):
The comments and opinions expressed in this newsletter are solely the work of McIver Capital Management, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this newsletter, is for general information only, does not constitute legal or tax advice, and the author McIver Capital Management does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability.
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