He reports that central banks will be forced to raise rates as economies experience economic declines.
Schwab believes that rate hikes and spikes in inflation will cause recessions in many countries:
“It’s time for discipline; including diversification between and within asset classes and periodic rebalancing. For overweight equity investors, we recommend using countertrend rallies to reduce exposure to strategic weights. For stock pickers, we continue to recommend a factor-based approach, with a focus on high quality, including factors such as high free cash flow yield, high earnings yield, revisions positive earnings and low volatility.
Nobody knows what will happen to Ukraine, the economy or the markets. The key is to be prepared. As I wrote in my columns over the past year, I was cutting back on my tech stocks. I added more gold, raw materials and energy. I was more than happy to add more defensive US stocks in the healthcare and consumer staples sectors. I was building the defensive wall.
Playing defensively can be important for those who are retired. Those in the accumulation stage might just make sure they are investing within their risk tolerance. Keep buying, stick to your investment plan.
Low volatility and outperforming dividends
We have seen that dividend factors work quite well in Canada (VDY.TO). Dividend growth and high dividends start to outperform in the US Low volatility stocks start to outperform as the low volatility factor finds higher quality, lower risk companies.
Investors are looking for “safer” stocks.
Here is a good article from Wisdom Tree on the outperformance of US dividend stocks. It captures the outperformance of US, international and high-dividend emerging markets equities.
I mentioned the strong performance of the big dividend payers in Canada. As I suggested on my site, the energy-hungry iShares High Dividend (XEI.TO) had the potential to outperform Vanguard’s High Dividend (VDY.TO).
Year-to-date, XEI is up 8.7%, compared to 7.4% for VDY.
Part of the Canadian Low Volatility Universe (ZLB), the index has returned 1.3% since the beginning of the year compared to 0.4% for the S&P/TSX Composite Index, benefiting from strong overall performance of the low volatility strategy in 2022.
The biggest positive driver was the exclusion of Shopify, which sold around 60% to start the year. Grocers, Metro (MRU.TO), Loblaws, (L.TO) and Empire (EMP.A.TO) and telecoms add to ZLB’s outperformance.
ZLB’s 90-day volatility is 9.4% versus 13.% for the TSX, showing that ZLB is true to its more defensive stance.
Canada is well positioned to benefit from high commodity prices
Last week I wrote about the inflationary effect of the war in Ukraine. Like Russia, Canada is a resource-rich country. We are ready to take advantage of very unfortunate events.
In addition, Russia has temporarily suspended fertilizer exports.
Over 30% of the Canadian market is made up of resource stocks. Soaring commodity prices have translated into double-digit gains in energy and materials stocks over the past two weeks.
This recent report from the National Bank of Canada highlighted the resource comparisons between Russia and Canada.
Source: National Bank
“The significant overlap in exports between Canada and Russia means that the prices of many key Canadian exports have increased. Whether these prices are sustainable or whether they will push the global economy into recession remains to be seen. This remains a vital issue for all market players, and difficult to handicap in the fog of war.
Events will certainly have an impact on our currency, equity and bond markets. Here is another excerpt from the National Bank report:
“Make no mistake, Canadians are shocked, saddened and angry by Russia’s actions. No one in Canada is happy with the situation in Europe. Recession risks are increasing, perhaps significantly. But despite the unfolding tragedy, there are significant near-term implications for Canadian trade, equities, currencies and credit markets, as well as a longer-term opportunity to replace what could become a nation pariah.
We have certainly experienced considerable volatility in the Canadian stock market. That said, Canadian stocks (XIC) are up around 3.6% since Russia invaded Ukraine on Feb. 24.