'Most people realize they probably shouldn’t be worth 40% more than two years ago'
What the markets are facing right now is a correction, not a recession, says one industry insider, but he’s providing portfolio advice in case one could yet be coming.
“Let’s call it a repricing, or price correction, but this certainly has been an interesting one because it’s been pretty fast and furious,” Craig Brasinger, chief market strategist for Purpose Investments, told Wealth Professional.
“I would say it’s more akin to the correction before 2020, when they used to last a month or a quarter, but it’s not what we’ve all become very accustomed to in the last while, which is a pullback in the market that would last two weeks, and then march on and make new highs. It’s interesting because, in talking with a lot of advisors, it doesn’t seem that clients are all that distraught over what’s going on.”
Brasinger noted that clients may have become used to the low-interest rate environment, post-pandemic stimulation, and “goosed asset prices” that delivered them such outsized returns.
“I think most people probably realize they probably shouldn’t be worth 40% more than two years ago. I mean, not much has fundamentally changed,” said Brasinger. “That’s why we enjoyed those outsized returns. Even a simple balanced portfolio did 10%, 12%, 15% in the last three years, and that included the pandemic, which is well above normal.”
Now, he said, the big question that’s captivating the market, but leaving people concerned, is whether this price correction is a precursor to a recession.
“While it’s painful, it isn’t necessarily a terrible thing,” he said. “But, it comes down to the big question: is there a recession on the horizon? Because the stock market is notorious for forecasting recessions, but it obviously also sends a lot of false signals in that direction.”
Brasinger noted that the economy is slowing down, and financial conditions are tightening, particularly in real estate, but the consumer side is still holding well.
“I think it’s probably too early to start sounding the alarm bells on the recession side,” he said. “I don’t think there’s a recession imminent this year. Next year could be different, but there’s still a fair bit of savings. There’s still a fair bit of stimulus. There’s still a fair bit of pent-up demand on the manufacturing side, just because of shortages. So, we think a recession isn’t imminent. We just think it’s slowing down, but that recession talk will likely grow louder in the months to come.”
Brasinger noted that the major change that Purpose has been making to its portfolios is with bonds.
“You can now start to get 4% yield on investment grade bonds, which is pretty attractive,” he said, “So, leaning into the weakness in bonds isn’t a bad idea.”
Purpose is also tailoring back a little on Canada. It’s been an outlier in performing better than a lot of global markets since it has more of the same resources that Russia and Ukraine have, so scarcities there are working for Canada while there have been more weaknesses in growth internationally, creating some pretty cheap valuations there.
“We’ve been taking some off the table in Canada and actually adding more into the U.S. on the growth side, just because of how valuations have come down,” said Brasinger, noting the drop in the NASDAQ, which is at, or below, its long-term average.
The final thing he noted is that “one of the most crowded trades out there, in the last number of years, has been people buying really short on duration and having more credit in their portfolios. Now that things are yielding more, I think you’re safer to add a bit more duration back to the portfolios.
“If we’re wrong, and there is a recession around the corner, or in 2023 or 2024, duration in the portfolio is going to become your friend again. And, with these higher yields, it’s a decent time to be adding to that.”