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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%



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