December 2022 update - Why is the market surprised

The U.S. Federal Reserve raised rates by 50 basis points yesterday. This marks a step down from its previous hike which was 75 basis points, yet it was still higher than the market had anticipated, hoping the Fed would do only a 25 basis point hike. As noted previously, inflation appears to have peaked in the U.S., so traders think that the Fed is very close to being done with rate hikes and might even start cutting rates near the end of 2023 to stave off a recession. But, in the announcement yesterday, the Fed Chair Jerome Powell spent a lot of time reiterating that the agency will not consider cutting rates until the inflation rate is consistently moving back towards 2%. With that signal that the Fed intends to keep rates high, the U.S. dropped. The overall picture hasn’t changed in this analysis and minimizing exposure to riskier assets remains the better choice today.

Sample portfolio for a Canadian investor

Asset class	ETF ticker	Weight
Canadian stocks	VCN	2.25%
US stocks	VUN	11.25%
Foreign stocks	VIU	9.00%
US corporate bonds	ZSU	0.00%
Canadian corporate bonds	XSH	0.00%
Global high yield bonds	MHYB	0.00%
Emerging markets bonds	ZEF	0.00%
Global real estate	TGRE	2.50%
Canadian mortgage-backed bonds	ZMBS	30.00%
Canadian government bonds	CLF	15.00%
Global government bonds	XGGB	15.00%
Gold	KILO	15.00%

Sample portfolio for a US investor

Asset class	ETF ticker	Weight
US stocks	SCHX	11.25%
Non-US stocks	SCHF	11.25%
US corporate bonds	SPIB	0.00%
Non-US corporate bonds	PICB	0.00%
US high yield bonds	SPHY	0.00%
Non-US high yield bonds	IHY	0.00%
Emerging markets bonds	VWOB	0.00%
Global real estate	REET	2.50%
US mortgage-backed bonds	MBB	30.00%
US government bonds	VGSH	15.00%
Non-US government bonds	BWZ	15.00%
Gold	GLDM	15.00%