The US Core CPI index measures the year-over-year changes in a basket of goods, excluding the volatile food and energy costs, but including costs of shelter. But the year-over-year calculation makes it sluggish to reflect month-to-month changes that may be a better leading indicator for inflation and interest rates.
As you can see from the chart above, short-term CPI indicators are already pointing to much lower inflation. This puts pressure on the US Federal Reserve and the Bank of Canada to stop raising rates sooner, which will be a welcome relief for all financial assets.
Nevertheless, we are also staring down the barrel of a recession next year. Recessions and lower interest rates generally favour investments with steady cash flow, like bonds and dividend-paying stocks. Mortgage rates are likely to fall along with economic activity, but the outlook for stocks depends on how deep the slowdown goes.
In addition to high-interest rates, the economy is facing headwinds from slow growth in China, re-shoring of production, consequences of war, and climate change. Add on top of this the likely increase in tax rates associated with addressing the fallout from the above, and we have a tricky mix of factors that could make this recession worse.
The Model
The Rigden Financial Model Portfolio is a portfolio of guaranteed investment funds (AKA segregated funds) chosen and updated to provide a starting point for investment planning. Segregated funds have a guaranteed value at death which makes them especially suitable for estate-conscious investors.
The Model is optimized for long-term growth and income in the current environment. These are the current asset allocation recommended. The portfolio is managed and should be understood as a go-forward guide rather than a historical track record because sometimes the worst-performing assets represent the best investment opportunities.
Fixed Income securities, usually in the form of a bond fund, are particularly well favoured at this time as the rates have been raised dramatically, inflation is coming down sharply, and the economy is likely to slow. Recommended allocation: 20%
Dividend-yielding stocks should benefit from the plateau and eventual decline in interest rates. Recommended allocation: 40% (20% Canadian + 20% Global)
Infrastructure is a reliable sector for investors now as government commitments to address climate change, overdue upgrades to existing structures, and, hopefully, post-war reparations will keep this sector busy over the coming decades. Recommended allocation: 20%
Large Technology companies with strong balance sheets should be able to ride out the economic downturn, help with infrastructure upgrades, and position themselves for opportunities when the economy emerges from recession. Recommended allocation: 20%