Are we going into a recession?
In short, we believe that a recession is likely. Illustrated in the graph below, Fidelity has positioned Canada to be quite late in the business cycle and nearing negative economic growth. However, there are a couple of silver linings to point out here. The first is that we predict inflationary pressure to reduce from its highs. The second is that markets tend to be forward looking so we can expect to start seeing a market recovery before the economy bottoms out. This is because investors factor in a number of variables, including the current economic outlook, when they consider what an investment is worth. If investors all have access to the same information, then it will be reflected in the investment’s current price.
What changes should I make to my portfolio?
While the business cycle is important and may affect an investment’s performance and “ideal” asset allocations, this effect is reduced over longer periods of time. The chart on the left illustrates how stocks, bonds, and cash have fallen in and out of favour in different phases of the business cycle. The chart on the right shows how a portfolio’s median performance in each phase evens out over 20 years. This suggests that if you have a solid plan and a longer time horizon for your investments, you will end up in the same place that you are supposed to be. That said, there can still be value to taking a more active approach, as the switches between different asset classes can help boost returns and reduce volatility.
What about high inflation?
With a looming recession, investor sentiment is understandably low. Moving to cash may seem attractive for some who have been burned, but Canada’s September inflation figure of 6.9% means that your dollar will not carry the same value that it used to. By staying invested, even in lower risk options like fixed income, you are acting to help offset the loss of purchasing power. Further to this, the chart below shows that historically, a balanced portfolio has performed better than cash when started in both periods of low and high inflation.
