Investor sentiment was low at the start of November as the U.S. Federal Reserve (the Fed) raised rates by 75 basis points (bps). However, things changed as the Fed released a statement suggesting it may potentially ease future hikes. At the same time, Fed chairman Jerome Powell reiterated that rates may stay higher for longer. Both equity and fixed income markets rallied following a lower-than-expected inflation report a week later.
Equity markets rose for the month of November, with the three major indices – the Nasdaq, the Dow Jones Industrial and the S&P 500, posting gains.
We remain cautious on equities and maintain U.S. equities position to underweight via hedges. Our Canadian Equity position remains neutral.
We are overall underweight equities and using options to hedge the downside while positioned against further downside. With hopes that the Fed may be near the end of its rate hike cycle, bonds delivered positive returns for the month. The yield on the 2-year U.S. Treasury saw its largest drop in over 10 years.
We believe that high quality bonds are well positioned to overcome recessionary risks, which we think may rise. Longerterm bond yields are likely to stabilize and ultimately fall as the recessionary environment is fully priced in. We are tactically adding long-term bonds in the portfolio and reducing our exposure to high yield credit.
Our stance on Canadian equities remains neutral as we believe the energy-dominated equities could face headwinds if aggregate demand and growth softens due to monetary tightening
As central banks approach the limits on interest rates, we believe yields could peak at levels not far from current readings. We are optimistic on high quality bonds that could withstand a recessionary environment. We deployed more cash towards Canadian investment grade bonds where we maintain an overweight position. While we have put some of our cash position to work investing in high quality bonds, we still hold an overweight position in cash as we look for opportunities in higher duration assets.