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%