Martin Pelletier: There are several things investors can do to protect themselves in this worsening market environment
Traders work on the floor of the New York Stock Exchange. Photo by Michael M. Santiago/Getty Images files The latest inflation numbers for the United States came out last Thursday and they were disappointing enough to initially send markets into another downward spiral as investors worry about further sizable rate hikes by the U.S. Federal Reserve.
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But despite higher interest rates and negative real U.S. wage growth for a record 18 consecutive months, consumers are just not getting the message and are still spending money like crazy.
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The core consumer price index, a figure the Fed closely watches, rose by 0.6 percentage points in September, well above what economists had been expecting, and services inflation is now the highest it’s been in more than 40 years.
I don’t know about you, but I’ve been wondering who the heck is paying US$500-plus per night for a standard hotel room, US$179 per day for a single Disney day pass, or US$28 on Taco Bell.
Shelter costs, meanwhile, accounted for more than 40 per cent of the CPI increase (excluding food and energy). Looking at the change in 30-year mortgage rates in the U.S., we calculate home prices need to fall a whopping 40 per cent to get to the same affordability levels prior to the rate hikes.
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We do worry that housing is much more of a problem here in Canada, though, especially since the UBS Global Real Estate Bubble Index just ranked Toronto as the world’s riskiest place for a housing collapse. Not surprisingly, housing listings are at their lowest level since 2002 as potential sellers simply hold off in hopes these risks are temporary.
There are, however, several things you can do to protect yourself in this worsening environment.
To start, cut your spending, cancel your vacation and put the savings to work in your retirement portfolio and/or start paying down your debt. If you’re retired and thinking of downsizing, consider a pair trade by selling your house in a tight market before it potentially collapses, thereby locking in some still very healthy gains, and moving into a rental where rates are already rapidly dropping. Then put the capital to work in a stock market that is now on sale.
The Investors Intelligence Bull/Bear Ratio, a market sentiment gauge based on a survey of more than 100 newsletter writers, indicates a buy signal when the ratio is below one. As of Oct. 11, %7B%22provider_name%22:%22Twitter%22,%22provider_url%22:%22https:%5C/%5C/twitter.com%22,%22object_url%22:%22https:%5C/%5C/twitter.com%5C/Barchart%5C/status%5C/1580375418481229825%22,%22html%22:%22The%20Investors%20Intelligence%20Bull%5C/Bear%20Ratio%20is%20a%20market%20sentiment%20gauge%20based%20on%20a%20survey%20of%20>%20100%20newsletter%20writers.%20%20Historically,%20when%20the%20ratio%20is%20below%201,%20it%20indicates%20extreme%20negative%20sentiment,%20which%20says%20the%20market%20is%20a%20buy.
As%20of%2010%5C/11,%20it’s%200.57,%20EXTREMELY%20negative.%20pic.twitter.com%5C/PTpixffSvW%E2%80%94%20Barchart%20(@Barchart)%20October%2013,%202022%5Cn%5Cn%22,%22type%22:%22oembed%22,%22channels%22:%5B%22desktop%22,%22tablet%22,%22phone%22%5D%7D” rel=”noopener noreferrer” target=”_blank”>it was at 0.57, an extreme low not seen since the 2008 financial crisis, according to Barchart Inc.
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The Investors Intelligence Bull/Bear Ratio is a market sentiment gauge based on a survey of > 100 newsletter writers. Historically, when the ratio is below 1, it indicates extreme negative sentiment, which says the market is a buy.
As of 10/11, it’s 0.57, EXTREMELY negative. pic.twitter.com/PTpixffSvW
— Barchart (@Barchart) October 13, 2022 This bearishness has pushed down the S&P 500’s valuation (after stripping out the mega caps) to 12 times earnings, from 17.5 times at the start of the year, well below the 20-year average of 16.7 times.
The energy heavy S&P/TSX composite index, meanwhile, has the potential to outperform the S&P 500, as it did from 2000, before ending in 2010 when the Fed really kicked in its quantitative-easing policies.
I have never seen the energy sector as fundamentally sound as it is now. Companies are paying down debt, boosting dividends and buying back shares at record-setting levels. Yet it remains one of the most hated sectors, trading at only two to three times cash flow.
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Article content For the more conservative investors out there, investment-grade corporate bonds are now yielding more than 5.5 to six per cent. Or you could put any savings to work in structured notes, which have embedded downside barriers of 25 to 50 per cent (from already depressed market levels) and coupons from five to as high as 20 per cent.
Instead of complaining about inflation, higher interest rates and the anxiety that comes with it, try adapting to the current environment by asking what you should do about it, and then put in a plan of action.
Central banks are now paying you to make this change and punishing those who don’t, so it could be a good time to take advantage of the opportunity while it lasts.
Martin Pelletier, CFA, is a senior portfolio manager at Wellington-Altus Private Counsel Inc, operating as TriVest Wealth Counsel, a private client and institutional investment firm specializing in discretionary risk-managed portfolios, investment audit/oversight and advanced tax, estate and wealth planning.
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