May update - Time for safety

The time has come to lighten up on riskier assets. US and European stocks are down around 15% from their most recent highs while Canadian and UK stocks are down by much less. Meanwhile, high-grade bonds, which normally provide some stability when the stock market is being volatile, have done anything but. Going by the iShares Core US Aggregate Bond ETF (Symbol: AGG) and the Vanguard Canadian Aggregate Bond ETF (Symbol: VAB), the broader US and Canadian bond markets are down over 10% from their peak late last year. This is their worst stretch since the 1980s. Every asset class seems to be going down at the same time and there are a handful of important reasons for that.


The biggest economic news right now is the high level of inflation in many countries. Inflation has been running persistently high for a while, reaching 8% in the US, a level not seen in 40 years. Canada and Europe are also experiencing this to various degrees. Part of this is coming off from the depression of the pandemic and the reopening. Russia’s invasion of Ukraine further exacerbated the problem by creating shortages in a number of commodities, including energy. Central banks have been caught by surprise and are raising interest rates to try catch up. Last week, the US Federal Reserve raised its rate by 0.50%, while the Bank of Canada had done the same earlier, and these hikes are likely to persist. Meanwhile, the economy appears to be slowing down, which will be exacerbated by the rate hikes. The OECD’s numbers show a continuing decline of economic activity in several countries. Obviously, no central banker wants to cause a recession, but that doesn’t mean they’ll succeed in managing a “soft landing”. All this is hurting bonds and stocks at the same time. Given their higher volatility, riskier assets and stocks are more vulnerable and it would be better to move into safer assets. For the time being, I am especially recommending reducing US and Eurozone stocks where possible, as well as high yield bonds and real estate stocks, while keeping Canadian, UK and developed Asian stocks (for now...). Instead, it would be better to switch into safer assets, especially short-term deposits or short-term bonds, as well gold. I updated my sample allocation tables accordingly, with red highlighting reductions and green highlighting increases.



Sample portfolio for a Canadian investor

Asset class

ETF ticker

Weight

Canadian stocks

VCN

6.75%

US stocks

VUN

11.25%

Foreign stocks

VIU

18.00%

US corporate bonds

ZSU

0.00%

Canadian corporate bonds

XSH

3.00%

Global high yield bonds

MHYB

3.00%

Emerging markets bonds

ZEF

1.50%

Global real estate

TGRE

4.00%

Canadian mortgage-backed bonds

ZMBS

21.00%

Canadian government bonds

CLF

10.50%

Global government bonds

XGGB

10.50%

Gold

KILO

10.50%



Sample portfolio for a US investor

Asset class

ETF ticker

Weight

US stocks

SCHX

11.25%

Non-US stocks

SCHF

24.75%

US corporate bonds

SPIB

0.00%

Non-US corporate bonds

PICB

3.00%

US high yield bonds

SPHY

0.00%

Non-US high yield bonds

IHY

3.00%

Emerging markets bonds

VWOB

1.50%

Global real estate

REET

4.00%

US mortgage-backed bonds

MBB

21.00%

US government bonds

VGSH

15.00%

Non-US government bonds

BWZ

6.00%

Gold

GLDM

10.50%