Equities Have Come Back from Behind But the Match Isn’t Over
There’s been plenty happening in markets and the world cup is moving into the knockout phase (go US)! Equities have staged a comeback rally as we move towards the end of the year, with the S&P500 rising +5% over the month. The rally has been positive for our portfolios, but a come from behind doesn’t mean that the match is over yet. We are still hedging.
On Wednesday, markets responded positively to fed chair Jerome Powell’s suggestion that interest rate increases are likely to slow as we move through the end of the year. While this may be true, we view the rally as an opportunity to hedge into strength while holding our investments in high quality companies.
Now’s not the time to be complacent
There are still a number of reasons we remain cautious, most importantly:
Inflation is still well above the feds 2% target. There have been some positive signals coming out of the housing market and parts of the labor market though 7.7% is still a high inflation rate and it needs to come down further. Only then will the fed be able to pivot policy direction.
Most lead indicators are pointing towards an economic slowdown into next year.
An economic slowdown is bad for company earnings, and there is potential downside risk to consensus earnings estimates in 2023. To mitigate this risk in our portfolio, we are overweight companies with earnings streams that are resilient through the economic cycle.
Stay invested, keep hedging
Next week, cash from a hedged note in our portfolios will hit the accounts. This hedged note returned ~0.5% over the period (from June 3rd to the end of November) in a flat market. We are pleased with the outcome - we received the positive return while the hedge protected us from risks that didn’t materialize over the period. Investor sentiment has improved, but these risks haven’t gone away.
Risk management is paramount to us in an uncertain environment and we are rolling the proceeds into a new hedge as we maintain our cautious approach leading into 2023. While we won’t attempt to time the market based on mixed data and shifts in investor sentiment, we will continue to hold high quality investments and maintain hedges until the clouds of uncertainty clear.
There are also reasons to be optimistic - the future rate of inflation is uncertain though the situation is looking better today than it did three months ago. Leading into 2023, we own a diversified portfolio of high-quality investments that should benefit from any recovery upside and generate solid compounded returns over time.
The CPI release on December 13 will be crucial, and we are ready to pivot our positioning as appropriate.
Disclaimer
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