Now that we have reached autumn, the threat of significant corrections of multiple asset classes, fuelled by excessive optimism, would appear to be unavoidable.
Given Jerome Powell’s comments at the annual Jackson Hole conference in late August, does anyone still think a recession is not on the horizon? More economic pain is clearly coming, the U.S. Federal Reserve chairman warned, and it looks as though interest rates will be even higher and persist for longer than many were expecting only a few months ago. Further market declines are likely on the horizon, as well.
As we head toward winter, it would seem as if the whole world is experiencing a crisis of some sort. Whether the issue is real estate in China, energy prices and geopolitical security in continental Europe, or the combination of high debt levels with ever-rising interest rates in North America, negative headlines are pervasive.
These disparate crises are converging, and the usual policy responses have knock-on effects. A response to one concern (for example, raising rates to curb inflation) could exacerbate another (housing prices being excessive with owners already highly leveraged). In short, addressing one problem often only makes another problem worse.
Canadians – and indeed, investors around the world – now need to reflect on our commitment to future actions if things go off the rails. We’ve already had stocks and bonds go down simultaneously for three quarters in a row. Real estate values have been dropping for most of 2022.
How will we behave if confronted with extended bad news? Will we shift our perspective and behaviour from one of optimism to one of determined realism? Will we hunker down and accept that times will be tough for a while? We simply need to take off our rose-coloured glasses to see things as they really are.
Will we reassess our outlook in anticipation of challenging times, or continue to act as though everything is fine and some sort of a soft landing is possible? Rather than point to metrics and traditional flashpoints, there’s a need to reflect on and commit to our collective future behaviour.
Everyone has a game plan until they get punched in the face, Mike Tyson famously quipped. What if the economy and the stock market conspire to punch us harder than we’ve ever been punched before? I believe we need to commit now to a level of stoicism, discipline and focused behaviour down the road. The circumstances may be worse than anyone has experienced in their lifetime. If that is the case, are you willing to withstand the pain?
There are practical steps that can be taken, such as reducing equity exposure within predetermined limits or moving equity holdings from those that emphasize growth to those focused on value.
Think of the captain of the Titanic who had received multiple alerts about icebergs in the vicinity, yet ignored them. Human pride can lead to denial of evidence, which in turn, can make the consequences of that denial even more painful than they need to be. Put another way, we’ll get to our destination eventually and there’s no need to be chasing arbitrary speed records in the present environment. There are still plenty of icebergs in our path.
John De Goey is a senior investment adviser and portfolio manager at Wellington-Altus Private Wealth Inc. His views are his own and not necessarily those of Wellington-Altus and do not constitute a recommendation.
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.