It Is Truly An Honour To Have Canada's Business News Network Want My Opinon

"Hey Scott, Michelle here from BNNB. Hope you've been well! I'm currently compiling a web piece on how the U.S. rate cut could impact Canadians and gathering all the different angles on it. Can you send me a blurb (as soon as you can) on how the rate cut might affect Canadian equities?"

OK Michelle, always happy to offer my humble opinions. But first a warning: they may be somewhat contrarian. I am not one to be drawn in to the conventional hype. There are so many advisors out there that will spin a positive perspective just to convince Canadian investors to continue their gamble on equity markets (i.e. that lower interest rates support equity market prices). Optimism sells. Risk management, on the other hand is boring. If you want excitement... what is the slogan for the casino in Niagra? (but you know that the odds always favour the casino). I always choose boring. Because in the long run, it works. Multiple yawns are now accepted.

Back in June 2018 as guest host on BNNB's "The Street", I told Paul Bagnell and any one who would listen (or was tuning in) that the economic and investing cycle that began in 2009 with the end of the "great recession" was long in the tooth and that we (at High Rock) were taking equity assets off of the table (reducing our exposure in our Global Equity model to underweight equities and overweight cash). That is the essence of being discretionary portfolio managers: our fiduciary responsibility to our clients transcends the selling required by non-discretionary advisors (to earn their commissions).

So even if clients were enthused by the new highs in equity markets at the time (and the positive impact on their portfolio values), we believed that reducing exposure to expensive risk assets (because, again, we are boring and manage risk first) was prudent. I said to Paul, on the show, that we did not advise clients to reduce risk. We just did it for them.

Low and behold, the fall (September through December) was not kind to most asset classes, especially following the U.S. Federal Reserve's December decision to raise rates. Volatility in equity markets jumped and those with reduced exposure (to equities) were subject to significantly less emotional duress than those who were fully invested.

Sorry Michelle, that was for a little context. Fast forward to now. The global economic environment is deteriorating, that cannot be argued. Everything economic is cyclical: always has been, always will be into the future. We are just about (if not already) at the end of the economic cycle. Trump administration tax cuts may have prolonged it a little in the U.S., but it is inevitably just a brief blip. Trump administration trade policies are going to negate all the positives (if there was truly any at all) from tax cuts.

So the Fed took a conservative approach and and took out an insurance policy by cutting rates 1/4%, which was fully telegraphed and expected. The Fed remains upbeat on U.S. economic prospects which prompted Fed Chair Powell to suggest this might be a "one and done" situation.

As we can all see in the above, "one and done" is not a common occurrence. I am going to go out on a limb and suggest that history will likely repeat and that there are plenty of rate cuts to come. As my good friend and trading mentor (from my bond trading days) Dennis Gartman has always said: when the Fed starts on a policy course, it is always longer and deeper than anyone initially anticipates. Our other good friend and out-spoken economist David Rosenberg (who has been predicting a recession later this year or in early 2020) thinks that ultimately the Fed Funds rate will go back to 0% in time.

Is that good for stock markets? At the moment, in a nutshell, no. There is plenty of scary and fast water to flow under the proverbial bridge that could cause a significant amount of erosion of confidence in both businesses and consumers. When they lose confidence, they postpone investment and spending plans. It is already happening (see my blog from Monday) in business confidence. When that transfers to consumers because they start to see their jobs disappear, that will be trouble.

Canada will not be immune. Sure, the last few months have seen a pickup in economic activity, but if Canada's largest trading partner stumbles economically, there will not be much to keep us all from being impacted. The Real Estate sector, which has been a huge support to the domestic economy in Canada is going to be vulnerable and so will the financial institutions (banks and mortgage companies) that have significant exposure to it. Exports of goods and materials, a big part of Canada's economy, continue to be exposed to the global trade uncertainties. Non-cyclical sectors like technology and health care will provide some safety as will the traditional "defensive" sectors like consumer staples and utilities. But remember, when traders and investors decide to sell, all risk assets (especially equities) will have a correlation of 1, which means that they are all going down in unison until value hunters start to look for bargains.

As I said in Monday's effort, passive investors need to just sit tight. Active and tactical investors (and managers) should already have some (more than normal) cash and cash equivalent balances to be ready to be put to work. The cycle will evolve, scaring the stuffing out of many, but it is important not to let emotion rule your decision making. In the end, time is on your side. Just breath through the next six to nine months and try not to look too closely at your statements when they role in.