Why advisors should preserve capital after central bank decision

Do interest rate calls imply we’re heading into a global slowdown? How should advisors brace themselves?

Why advisors should preserve capital after central bank decision

In the wake of Wednesday’s dual decisions from the US Federal Reserve and the Bank of Canada (BoC), advisors should prioritize preserving capital, according to one leading financial analyst.

Despite a resilient assessment of the Canadian economy from the BoC, Sean Coakley, market strategist at Cambridge Global Payments, thinks that Canadian advisors should take defensive positions and keep an eye on US indicators beyond interest rates.

“Financial planners need to be aware when they're talking to their clients that defensive positioning isn’t a bad idea at this point,” Coakley said. “We've seen a few periods of 15-20% drawdowns on the S&P 500, and then bouncebacks. When we see that again … if it accompanies an increase in unemployment in the United States and a decline in consumer confidence in the United States, then that would be the sign that we're actually in a recession.”

Coakley says a financial advisor’s current priority should be preserving their clients’ capital. He thinks high-interest savings accounts, defensive consumer staple stocks, and money market ETFs are smart ways to keep capital safe and relatively liquid.

Even though the Fed appeased the market with a 25 bps rate cut, Coakley stressed that we don’t know the full economic picture underlying their decision. It could be a cut akin to 1998, which stimulated the US economy, or a cut like the early ‘90s or 2001, when we found out, 9 months later, that the US was in a recession at the time.

The Fed’s announcement was couched in hawkish language, implying another rate cut may not come soon. Their statement was missing the familiar promise to “act as appropriate” to sustain the expansion.

“The Fed cushioned the blow somewhat and reinforced that policymakers are not on a preset path,” said Candice Bangsund, vice president and portfolio manager, global asset allocation, Fiera Capital. “This supportive language will ultimately endorse the central bank’s data-dependent approach, with the Federal Reserve leaving the door open to further stimulus if warranted.”

The Bank of Canada’s decision to hold rates at 1.75% reflects a Canadian economy driven by a big overall uptick in employment numbers, especially in Ontario. Widespread fears of a Canadian recession in 2019 haven’t materialized.

“There's a lot of support in consumer confidence and consumer spending for the average Canadian family. And we've all seen strong employment,” says Coakley. The BoC downgraded its economic forecasts for 2020 and 2021, though, citing a slowing global economy.

Coakley believes that any global recession will be mediated through the US economy. He sees the Fed’s hawkish cut as a buttress to US markets, but it’s no guarantee against a slowdown. Coakley thinks consumer confidence and employment numbers will tell the full story. While advisors keep a weather eye on that horizon, he said they should keep their clients’ capital safe and ready to move when the storm hits.

“I want to protect my capital just in case we see a drawdown, so that when the drawdown is at its nadir, I can start to deploy assets into more risky areas,” Coakley said. “When unemployment starts to spike and you start to see like the narrative change in financial media and the mainstream media, that’s when the opportunities will start to present themselves.”