“In contrast to the Federal Reserve, the Bank of Canada did not mention that they need to front-load rate hikes or be ‘forceful,’” said in an emailed statement. “The first part of the statement [from the BoC] reads a bit more cautious on the Canadian economy than the previous one, showing that the tightening is working but also means they can slow down the rate hikes into early next year.”
With echoes of the Volcker-era crusade against inflation still fresh in their memories, North American central bankers are doing whatever it takes to bring price stability back to the markets. That creates a very real possibility of stagflation or recession, which Mahrt says portfolio managers should prepare for.
“For any central bank to stick a soft landing at this point would be incredible, but highly unlikely,” he says. “The way you structure a portfolio for inflation is very different from how you would structure a portfolio for a recessionary environment.”
Anticipating today’s market environment, Mahrt says he and his team started peeling back bond exposures from client portfolios about a year and a half ago, and changing their equity focus. Today, they have a roughly 23% weighting in cash, and scaled back both equity and bond positions to move into alternatives such as commodity-trending strategies, long-short commercial credit, and structured products.
“The traditional 70-30 or 60-40 equity-to-bond portfolio that worked so well for the last 30 years is not going to work for the next 30. It’s not going to work for the next 10,” he says. “Since January this year, people largely went into bonds. And they’ve been hurt as well, because both the stock and bond markets have gone off in this bear market.
