Monthly portfolio brief

Let your strategy be your portfolio's guide

What you need to know

• Market volatility eased and portfolio returns were subdued in April, with asset class returns mixed around the flatline. Upbeat portfolio returns so far this year have helped to reverse some of 2022’s losses, though volatility is likely to pick back up.
• To the surprise of many, international equity exposure has been providing meaningful support for portfolios. Weakness from more cyclical areas of the U.S. equity market, on the other hand, has continued to weigh on portfolio returns.
• We've raised our recommendation for U.S. small- and mid-cap stocks and lowered emerging-market stocks – both to neutral. We believe it's appropriate to take a more balanced approach with portfolios in this market environment.

Portfolio tip

Check how your portfolio aligns with your long-term investment strategy to help ensure your portfolio swings remain within your comfort with risk.

Where have we been?

Portfolios have grinded higher, even with the market's recent “wait and see” approach. Portfolio returns in April weren't overly exciting, although we recognize the general market's resiliency in recent months is somewhat of a tough act to follow. We've hit short periods of volatility, and the markets face headwinds such as high inflation, tighter financial conditions, and elevated recession risks. But portfolios have trended higher so far this year, reversing some of 2022’s losses.

Portfolios have been powered higher by inflation's movement lower, which has increased the Bank of Canada's and Federal Reserve's ability to pause rate hikes. We’ve also seen strength recently within labour markets and the economy more generally.

Lower volatility may be indicating a ”wait and see” approach as markets watch to see if inflation will approach central bank targets without additional tightening of monetary policy, a significantly weaker economy, or a meaningful hit to corporate earnings expectations.

Broad international exposure has been serving balanced portfolios well. All our recommended asset classes are higher over the past six months, with the exception for U.S. small- and mid-cap stocks, but developed-market overseas equities have been providing the most support to portfolio returns. To the surprise of many, developed overseas equity asset classes have outperformed their Canadian and U.S. equity counterparts, despite elevated geopolitical risks, relatively higher inflation, and increased recession risks.

Over the past six months, developed overseas large-cap stocks have returned 23.7%, while U.S. large-cap stocks have returned 8.2%. Canadian large-cap stocks slightly trailed, up 8.0%. Developed overseas small- and mid-cap stocks are up20.4% over the same period. Emerging-market stocks have also performed well, returning15.9% in six months. U.S. small- and mid-cap stocks, however, have dropped 0.3% over a six-month period following uncertainty within the U.S. regional banking sector, including First Republic Bank.

Interest rates bounced a little in April, but bonds remain up for the year. While there have been hopeful signs that inflation will ease in the coming months, it remains elevated in many countries. Markets are watching to see how much more central banks may need to do to bring inflation closer to their long-term targets.

Interest rates fell in response to March’s bank-related turmoil but slightly bounced from the year's lows. We believe this demonstrates that a bit of monetary-policy uncertainty remains. Canadian investment-grade bonds are meaningfully higher over six months, returning 5.2%. Past performance is not a guarantee of future results.

What do we recommend going forward?

Revisiting what you expect from your portfolio over the long-term can set the stage for what may lie ahead. The year's rise across asset classes hasn't been unwarranted, given ongoing economic strength and easing inflation. While we expect market volatility to pick back up from recent lows, we don't believe we need to revisit last year's bottom before portfolios find a more durable rebound later this year.

Market volatility is normal and can impact your portfolio in a variety of ways, depending on your allocation to stocks and bonds. Talk with your Financial Advisor about what you may expect from your portfolio, given your investment strategy. Reviewing how your portfolio may fluctuate over time can help remove surprises from investing and keep you focused on your financial goals.

Compare your portfolio’s current allocation to the target allocations of your investment strategy. A key component of a solid investment strategy is its long-term, or strategic, asset allocation, which defines specific target weightings to individual asset classes. Your Financial Advisor can help you determine the strategic allocations for your investment strategy. This important step can serve as a guide to building and maintaining a portfolio that’s within your comfort with risk while working toward your financial goals.

We expect economic growth to continue to weaken, as it did in the first quarter, though we don’t anticipate a severe or prolonged downturn. In periods of uncertainty, markets could fluctuate within a range, or investment leadership could rotate. months as leadership has rotated among different segments of the market, interest rates have fluctuated, and monetary policy expectations have shifted.

From here, markets are likely to be sensitive to economic and monetary policy trends in the near term before shifting the view toward what we believe will be an eventual, more sustained recovery ahead. Therefore, we recommend aligning your portfolio with long-term strategic (neutral) allocations in today's market environment. We'll continue to evaluate market opportunities in a quickly changing landscape.

We've moved U.S. small- and mid-cap stocks and emerging-market stocks to neutral within our opportunistic guidance. U.S. small- and mid-cap stocks, which are more cyclical in nature, have already faced pressure from weakening economic growth and banking-sector concerns. Although we think a mild economic downturn is ahead, we believe the weakness in small caps has already priced in an outlook for a slowing economy, supporting a more balanced approach.

Emerging-market stocks, on the other hand, have had an impressive run over the past 6 months. Increasingly supportive policies in China have provided a boost to the economy and investment returns more recently. However, we believe it's become more uncertain how much further China's reopening can lift emerging-market stocks in the near term, particularly as global growth slows and demand weakens more broadly. Therefore, we recommend neutral allocations.

Talk with your financial advisor about how you can use your investment strategy as a guide in this market environment.

Investing in equities involves risks. The value of your shares will fluctuate and you may lose principal. Special risks are inherent to international and emerging market investing, including those related to currency fluctuations and foreign political and economic events.

Strategic asset allocation guidance

Our long-term, strategic asset allocation guidance represents our view of balanced diversification for the fixed-income and equity portions of a well-diversified portfolio, based on our outlook for the economy and markets over the next 30 years. The exact weightings (neutral weights) to each asset class will depend on the broad allocation to equity and fixed-income investments that most closely aligns with your comfort with risk and financial goals.

Diversification does not ensure a profit or protect against loss in a declining market.

Diversification does not ensure a profit or protect against loss in a declining market.

Opportunistic asset allocation guidance

Our opportunistic asset allocation guidance represents our timely investment advice based on current market conditions and our outlook over the next one to three years. We believe incorporating this guidance into a well-diversified portfolio may enhance your potential for greater returns without taking on unintentional risk.