John De Goey, portfolio manager at Wellington-Altus Private Wealth
Focus: Personal finance and ETFs

MARKET OUTLOOK

The Shiller CAPE index has been hovering around the second highest level it has ever been at for about two years now, lower only than it was during the dot-com bubble. It is already higher than it was before the global financial crisis and about where it was before the great crash of 1929. Since 2018, the CAPE index for the S&P 500 has been in the very high 20s or low 30s. That suggests that stocks are trading at valuations that would require a drop of 30 to 50 per cent in order to be priced fairly. The Shiller CAPE index is widely accepted as a reliable predictor of future medium-term returns, since markets revert to the mean over long time horizons. It suggests that a decade from now, U.S. stocks will barely be higher than they are today. Most people are not particularly worried, however. Call it “irrational confidence.”

In addition, we had a U.S. yield curve inversion in Q2/19. Inverted yield curves frequently precede bear markets within six to 18 months of their occurrence. To top it all off, every day we set a record for the longest-running bull market in history. It strikes me as curious that so many ordinary and independent people are predicting a recession, yet so few money managers are worried about one. Could it have to do with motivated reasoning? Recessions and bear markets (drops of 20 per cent or more), while not the same thing, are highly correlated.

Given that things have been good for so long, it strikes me as only prudent to re-position a portion of your money into inverse products and strategies in order to preserve capital. This week, I’m re-positioning over one third of my clients’ equity assets into two-year inverse notes for both the S&P 500 and the TSX. If markets continue to rise, my clients will benefit from being predominantly long. If they fall, however, their significant inverse positions will do a great job of preserving their overall wealth. I’m playing defence in 2020 —and 2021 as well, if necessary.

TOP PICKS

SMARTBE GLOBAL VALUE MOMENTUM TREND INDEX ETF (SBEA NEO)

S&P/TSX 60 DAILY INVERSE ETF (HIX:CT)

BETAPRO S&P 500 DAILY INVERSE ETF (HIU:CT)

PAST PICKS: APRIL 8, 2019

VANGUARD FTSE EMERGING MARKETS ETF (VEE:CT)

• Then: $35.05
• Now: $34.81
• Return: -1%
• Total return: 2%

PURPOSE BEHAVIOURAL OPPORTUNITIES ETF (BHAV:CT)

• Then: $20.87
• Now: $21.58
• Return: 3%
• Total return: 3%

ISHARES ESG MSCI EAFE ETF (XSEA:CT)

• Then: $20.26
• Now: $21.06
• Return: 4%
• Total return: 7%

Total return average: 4%

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