It reports that central banks will be forced to raise interest rates as economies experience economic downturns.

Schwab believes that rate hikes and inflation spikes will trigger recessions in many countries:

“This is a time for discipline; including diversification across and within asset classes and periodic rebalancing. For investors who are overweight in equities, we recommend using counter-trend rallies to reduce exposure to strategic weights. For stock voters, we continue to recommend a factors-based approach, with an overarching emphasis on high quality, including factors such as strong free cash flow returns, high earnings returns, positive earnings revisions and low volatility.”

Nobody knows what will happen to Ukraine, the economy or the markets. The key is to be prepared. As I wrote in my columns for the past year, I was in the process of shortening my tech stocks. I added more gold, raw materials and energy. I was more than happy to add more defensive US stocks in the healthcare and consumer staples sectors. I was building the defensive wall.

Playing on the defense can be important for people in the retirement phase. Those who are in the accumulation phase can simply make sure they invest within their risk tolerance. Keep buying, stick to your investment plan.

Low volatility and dividends outperform

We’ve seen dividend factors work quite well in Canada (VDY.TO). Dividend growth and high dividends are starting to outperform in the US Low-volatility stocks are starting to outperform as the low-volatility factor indicates higher-quality, lower-risk companies.

Investors are looking for ‘safer’ stocks.

Here’s a good Wisdom Tree article on the outperformance of US dividend stocks. It reports the outperformance of high-dividend US, international and emerging markets.

I reported on the strong performance of the major dividend payers in Canada. As I suggested on my site, the energy-intensive iShares High Dividend (XEI.TO) had the potential to outperform Vanguard’s High Dividend (VDY.TO).

Year-to-date, XEI is up 8.7% versus 7.4% for VDY.

Looking at the Canadian Low Volatility Universe (ZLB), the index is up 1.3% against the S&P/TSX Composite Index 0.4% since the beginning of the year, benefiting from an overall strong performance from the low volatility strategy in 2022.

The biggest positive driver was the exclusion of Shopify, which sold about 60% at the start of the year. The grocers, Metro (MRU.TO), Loblaws, (L.TO) and Empire (EMP.A.TO) and telecom contribute to ZLB’s outperformance.

ZLB’s 90-day volatility is 9.4% against 13% for the TSX, demonstrating that ZLB is faithful to its more defensive orientation.

Canada is well positioned to benefit from high commodity prices

Last week I wrote about the inflationary effect of the war in Ukraine. Like Russia, Canada is a country rich in resources. We are ready to take advantage of the very unfortunate events.

A moment of “you didn’t fire me, I resigned”, Putin bans the export of products and raw materials until December 31. There may be some details/exceptions, but this should drive up all major commodity prices further.

Here is Russia’s *exports* as % of major commodity production👇 pic.twitter.com/AcGtv9yUX0

— Emre Akcakmak (@akcakmak) March 8, 2022

Russia has also temporarily halted the export of fertilizers.

More than 30% of the Canadian market is weighted by commodity stocks. Rising commodity prices have translated into double-digit gains in energy and materials inventories over the past two weeks.

This recent report from the National Bank of Canada highlighted the comparisons of resources between Russia and Canada.

Source: National Bank

“The significant overlap in exports between Canada and Russia means that the prices of many key Canadian exports have risen. It remains to be seen whether these prices are sustainable or whether they will push the global economy into recession. This remains a critical question for all market participants, and a difficult one to handicap in the fog of war.”

The events will certainly have an impact on our currency, equity and bond markets. Here’s another clip from the National Bank’s report:

“Make no mistake, Canadians are shocked, saddened and angry by Russia’s actions. No one in Canada applauds the situation in Europe. Recession risks are increasing, perhaps significantly. But despite the unfolding tragedy, there are significant short-term implications for Canadian trading, equities, currency and credit markets, in addition to a longer-term opportunity to fill in for what could become a pariah nation.”

We have certainly experienced significant volatility in the Canadian stock market. That said, Canadian stocks (XIC) are up some 3.6% since Russia invaded Ukraine on Feb. 24.


This post Understanding the markets this week: March 13 was original published at “https://www.moneysense.ca/save/investing/making-sense-of-the-markets-this-week-march-13/”

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