Financial markets everywhere are experiencing a panic moment similar to the onset of the pandemic. Even Wall Street’s mood has turned apocalyptic. 

Admittedly, preserving portfolio values has been challenging recently. Everything has declined at the same time … stocks, bonds and inflation-adjusted cash returns. This type of synchronized downturn is extremely rare. 

What is not rare is market sell-offs, over-reactions and the indiscriminate liquidation that follows. Fear becomes rampant and feeds upon itself. The saddest aspect is that even long-term investors can succumb to these emotions.

What Investors Need To Know

Global risks are indeed elevated. The major news themes are soaring inflation, a disruptive war in the Ukraine, hawkish central bankers, more lockdowns in China and persistent supply chain problems. 

And, with inflation and volatility also at elevated levels, price signals become less reliable. That means the risk of making bad investment decisions has exploded higher. 

But as a sense of gloom descends on the world’s collective consciousness, some perspective is in order: risks are now far lower than prior to the Russian invasion. Severe market declines and indiscriminate panic selling have already happened. Risks associated with the war are now known risks and volatility is moderating. Stock market valuations are lower. Many international investment classes are deeply on sale. Above all, retirees can finally benefit again from higher yields.

Public sentiment is also at a negative extreme. Try as they might, investors see no positives at all. What that means is that any “positive” development, even a minor one, can cause raucous rallies. Every one of the negative developments listed above, could turn around into a positive within the next three months. Of course, subsequent gains will be missed by those investors who abandoned their long-term outlooks.

Looking Ahead: Portfolio Positioning

A key blind spot for many investors is that sustained market declines almost always unfold alongside a recession. That probability is low right now. In fact, beyond this soft patch, another phase of global economic growth is likely. The labour market is booming. Household net worth has soared. With deeply negative real rates, central banks are nowhere close to short-circuiting the recovery. And, quietly, China’s fiscal and monetary policymakers, now critical for the direction of the global economy, have turned stimulative. Macro numbers released this week show a widespread improvement in growth.

Looking ahead, a key danger lies in investor complacency — refusing to change portfolio strategy to align with the new macroeconomic fundamentals of higher inflation and higher interest rates.  The bias for many is to run back and “buy the dip” in the investment leadership that worked in the past decade. But if those macroeconomic trends of the last decade have been punctured, then it would be highly unusual for leadership not to change as well. 

Investment classes dependent on low interest rates are now the most vulnerable: US growth stocks, the tech sector, cryptocurrencies and even residential real estate. Outperforming assets will be those that thrive during periods of higher inflation and higher interest rates. The left-for-dead international value stocks are particularly compelling. 

Experience has taught us that it is best to remain rooted in the long-term fundamentals of economic growth and the major global trends that will shape capital markets. Our investment team remains committed to that approach and will continue to apply that discipline to the current environment. 

Thank you to all our investors for their ongoing support.