A Comment -- General Comments From an Expert (A Commentary)

How to find long-term value amid the chaos? Why is there a disconnect between commodities and the CAD? Patricia: USD has performed very strongly the last 2-3 months against all currencies. That's one reason the CAD is not doing well. Plus, people are thinking of a recession, and this has an impact, even a psychological one, on demand and the prices of commodities. Third, the supply chain is being supplemented by other countries now entering the market. For value in commodities, take a look at energy transformation, such as Chile producing low-cost lithium or Peru.

When to lock in medium-term bonds (4-8 years)? Earl: Tactically, late summer, as the bond market will rally from the peak into the end of the year. But strategically, if you have only one option, wait until January when we should get the pricing of any recession and inflation. One key thing is to look at active management. In this market, you don't want to be in a sailboat, you want to be in a rowboat. With passive management, you get 100% of the gains, but also 100% of the losses.

What do you watch each day in equities vs. bonds? John: Higher inflation and higher rates have hurt both. As the economy slows down and inflationary pressures recede in the back half of the year, we'll see a move back into bonds. We're already seeing this when bonds rally on down market days.

Signs that we're nearing a bottom. Patricia: In certain markets, we've already hit bottom. In NA, not just yet, perhaps in next few months. Emerging markets remain cheapest as a class right now. John: Technical indicators. Market peaked last November. We probably started a recession in February 2022, and markets typically bottom 6 months before the end of a recession. He's putting a bottom in any time. Bottom line is that he'll never nail the bottom, and stocks are cheap enough for him to use his cash balances to add stocks. Earl: He keeps watching the volume on stocks. The washout isn't just price, it's volume too. Even though we're down 20%, the volume isn't there yet. When he sees the volume come back, that's the end.

How to offset higher inflation effects on RRSP? Earl: Get some active management in there. Plus, high-quality, corporate bonds that yield at least 5%. Inflation-linked bonds, get ready to buy in 2023, not just yet. At some point, exposure to gold in 2023 makes a lot of sense.

When will housing get more affordable? Patricia: We'll have to keep an eye on incremental changes in the interest rates. When we think those have peaked, we'll see an inflection point in the housing market. Right now, it's hard to say. John: When the economy starts to roll over. This is not the same inflation valuation and financial mechanics problem as in 2008. Canada may see a downturn, but it won't blow up the way it did in the US.

Good time to nibble at banks and insurance companies? John: Insurance companies, he doesn't worry about. Canadian banks are fine, they'll pay their dividends. But a lot of the tailwinds will turn into headwinds. He wouldn't rush in there. He'd look at the US banks more, or at Canadian telcos to give more protection in a downturn. Patricia: Good banks in the global markets depend more on the spread. So with rising rates, they get to reprice their loans.

Is BOC hiking rates what's responsible for inflation? Earl: The interest rate number you see is a combination of the BOC rate plus inflation. They'll get inflation down by raising rates faster than inflation, because it reduces demand. With people buying less, the price on the offer side comes down.

Will inflation come down enough that the BOC doesn't have to be as aggressive? Earl: Yes, we're seeing signs that prices are coming down in some areas, but it doesn't matter. The target rate for inflation is 2-3%. Even if we peak at 8% and come down to 5%, that's not good. Interest rates have to be above inflation to break inflation.

Why has fixed income been hit so hard? Earl: Record down year for fixed income. Reason is inflation. Good thing is that now we're down, the coupons will be higher. Expects further losses over the summer, and then we'll settle down for the year. He'd recommend reducing the duration in your portfolio, which will take away some of the price volatility and negative price movement. For example, if the duration is 5 years, reduce it to 3.

The one thing to think about heading into the second half of 2022? Earl: It's a secular environment of higher volatility, inflation, and interest rates that will last 5-20 years. You want to own the companies that have hard assets, the ones that hurt if you drop them on your foot. Patricia: Own quality compounders. Cash returns on assets. Do your due diligence. Be an active investor. John: Assess risk profiles of the stocks you own. If you can't sleep at night, maybe you shouldn't be as involved in the market. Tremendous opportunities right now, whether in the next 2 weeks or 2 months, for the longer term.

People fixate on stock prices and ignore intrinsic value. The markets have fallen 20%, but mostly that's from multiples contraction. In fact, this and next year's earnings have not changed that much. Keep an eye on company earnings coming for signals. We're probably in a recession which will impact earnings which were only 8-10% and could decline. There could even be flat earnings in the next 6-12 months. After 2009 to 2021, there was a compression of the risk premium in all kinds of assets, and that's widening further today. Something has to give in the dichotomy between the stock market and earnings. Expect volatility.

Commodity rallies are wild but short-lived, says Carley Garner, technical analyst. Commodity booms are good for traders, not investors. Such booms are very volatile and can edge suddenly and violently. The GSCO commodity index over 50 years, shows commodities were rangebound in the 70s through 90s, then moved into a higher range in the 2000s, but stayed there. These booms never last. In 2007, we feared we would run out of oil, but by 2014 there was a oil glut. Supply rises to meet demand, then prices fall. The last 20 years of the GSCO show a boom, then bust, boom then bust.

Important to remember timeframes in uncertain times. Faster pace of Fed rate hikes is likely to stabilize. Inflation is close to peak.