Watching for the turning point in a volatile market

Investors beaten up this year may be able to start finding comfort in the idea that the worst is behind them.

The bad news is everywhere: rare double-digit drops in both equities and bonds, the 60-40 portfolio in the dumps, a war in Europe and forecasts for recession getting louder. “Investors have been clubbed over the head,” said Pierre Daillie, managing director of AdvisorAnalyst.com, on a panel at the Inside ETFs Canada conference in Toronto on Tuesday.

But that doesn’t mean there’s only gloom and doom ahead. Simona Mocuta, chief economist with State Street Global Advisors, said that while there’s a lot of bad news out there, it’s important to also keep the big picture in mind and consider how much of the adjustment has already taken place.

“I don’t think it’s all glass half empty,” she said.

The economy is slowing and a recession is likely, but she’s already seeing disinflationary signals. Whether it’s shipping costs, wage plans, price plans or housing, Mocuta said leading indicators are pointing downward.

“I think the big story next year is going to be one of disinflation,” she said.

That doesn’t mean we’re going to get from 8% to 2% overnight, but central banks could be closer to their target before many assume. “Don’t be surprised if, at the end of next year, we see inflation numbers that start with a 2,” Mocuta said.

That will create opportunities for investors as fears subside.

For Mary Hagerman, portfolio manager and investment advisor with Raymond James, that means keeping clients invested. She made some adjustments earlier this year, decreasing equity exposure to Europe and China, and reducing bond exposure overall, moving to short-term products and cash. But she said she never gave up on the 60-40 portfolio, even if the 40 at times was primarily in cash.

Hagerman said we may be at a turning point where, after a painful year of rising yields, bonds are beginning to look good again.

“Now’s the time to roll over into longer duration, and investors are going to get bang for their buck out of that portion of their portfolio,” she said.

For investors starting out now, Daillie said, the 60-40 portfolio looks a lot better now than it did a year ago, now that equities are less expensive and bonds are yielding 4-5%.

Some market strategists have viewed this year’s bear market as the end of a period of globalization and low inflation, with a challenging environment ahead. Mocuta said investors everywhere are trying to figure out what the new normal looks like in a world that’s no longer globalizing.

But she said some people are embracing the deglobalization narrative too enthusiastically.

“We tend to extrapolate from a moment in time and we forget that technology is very deflationary, demographics are not getting better,” she said. “I’m open to the idea that maybe [we won’t have] sub-2% inflation. Maybe it’s 2.5% inflation. But I don’t think it’s 3%, 4%, 5% inflation on a sustained basis.”

Hagerman said that means tech is likely to rebound from the hit it’s taken this year, while the bounce for energy stocks isn’t likely to last. She also said she’s maintaining global weightings.

“These markets that are underwater can bounce back extremely quickly for reasons that we didn’t see coming,” she said.

Advisor’s Edge is an Inside ETFs Canada media sponsor.