The first half of the year was particularly painful for investors, with traditional asset classes, such as equities and bonds, registering large declines, making this one of the worst starts for balanced portfolios in decades.
The bond market appears to be wrestling with two key themes. First, how aggressive do central banks need to be with hiking rates to cool inflation? And second, are these actions too aggressive and risk sending the economy into a recession?
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Conventional wisdom asserts that changes in interest rates are a reliable determinant of performance differentials between value and growth equity investment styles. Using more than four decades of data, our experts find this assertion to be false.
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We're seeing some kind of a regime change in the market, where the market's trying to price in higher inflation. Higher quality defensive stocks aren't working right now because costs are rising for businesses due to inflation. The opportunity, though, is that higher quality defensive stocks are now available at more reasonable valuations than they've been in the past. Right now could be the best time to own them if the economy were to falter going forward.
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Markets and policy makers were clearly caught off guard by this year’s inflation spike. A close look at the factors behind the upsurge suggests that a lot of the blame rests on the fact that Covid-19 is the “gift” that keeps on giving as a disruption to the smooth functioning of economies, including our own.
Luc de la Durantaye, Chief Investment Strategist and CIO, CIBC Asset Management, discusses how the outlook for fixed income might be more positive than it is for equities.
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