Will this be like 2022?

It happened.  Our “No Bueno” rise in oil prices rippled into fears of inflation and rising interest rates.

The result – Both stocks and bonds were in the red for March. How reminiscent of 2022.

But don’t be fooled.  First step panic is a terrible investment strategy.  Where we are now compared to 2022 is quite different.  Here’s a few reasons why.

Supply-side Inflation (Cost -push) vs Demand-side inflation (Demand-Pull)

Yes, 2022 had surging oil prices due to the Russian invasion of Ukraine (supply side inflation), but we also had significant demand side inflation coming out of massive Covid stimulus.  Lockdowns ended, and all that spending had to catch up.

Central Banks raised rates dramatically to dampen the surge in prices.  From the short end to the long end, the Yield curve made a parallel shift up. Stocks were down -20%, Bonds down -10%.  Mag7 names like Meta and Nvidia were down -70%.

2022 US Treasury Yield Curve

2026 ytd US Treasury Yield Curve

Today - we don’t have the same pressure from excess demand. 

Central banks raising rates won’t bring peace to the middle east or force oil prices lower. 

If oil prices stay elevated, I do expect inflation to rise.  But for interest rates, I don’t see a parallel shift up like 2022, but rather a steepening.  I’d expect central banks hold, while markets push longer term yields higher.

Last month, we made the fortuitous decision to trim our long term bond exposure (PMIF) in favour of Short term bonds (XSH) and Long/Short exposure (FGLS).

TACO tracking

Bloomberg has compiled the data.  Looking back at Tariff threats, the odds would favour Trump only following through on a fraction of what his truth social posts claim.

It would be naïve to think this conflict ends tomorrow and oil prices go back to $60/barrel.

But markets don’t need it to.

If Oil prices continue to trend down, markets will look through short term pain.

Your Friend Volatility

In my industry, the term volatility is just a euphemism for “losing a lot of money quickly”.

It’s never just lower left to upper right. Stocks go down. For defense first investors, that’s a buying opportunity.

Last week, markets crossed our threshold with a -10% correction.  This triggered our buy rule, and we began increasing our equity allocations.

One area of particular interest was Cyber Security.

Paolo Alto and CrowdStrike had sold off more than -30% since the October highs on the fears AI will make these companies obsolete.  The rhetoric has been AI can find vulnerabilities in code instantly.

I think the market has it so wrong on this.

• Bad actors can also use AI to find and create vulnerabilities

1. • AI-Powered Hacks Surge 89%, Cloud Attacks Spike 266% — Cybersecurity ETFs Step Into The Spotlight
   • Code vulnerabilities represent the smallest vector of attack.  Social engineering is the biggest risk.

• Cybersecurity is not an optional line item

1. • Companies will continue to boost cybersecurity.  When they don’t - it’s a liability and reputational risk waiting to happen

• This is where defense budgets are going
• • As we’ve seen in Ukraine, and now the middle east, $4 million missiles and defense systems are yesterday’s wars.
  • The future is swarms of cheap drones and cyberwarfare.

Take what the market gives you.  Volatility is our friend, giving us good companies at great prices.

Top & Tail Focus List

-4.34% in March, +4.45% YTD

What a wild ride Q1 has been.

The focus list was positioned to be conservative, opting to beat the market on the downside while keeping pace on the upside.

For many months, we’ve been underweight stocks (50% allocation), faded expensive Tech, and overweighted metals and miners.  Instead, we’ve beaten to the upside, while only trailing marginally to the downside.

I can’t say performance has gone exactly as planned, but I’m not complaining.

With markets selling off ~7% from recent highs, we’re increasing our Equity exposure.

• Equities 50%-->55%
• Fixed Income 40%-->35%  

It’s unlikely markets will be straight up from here, but some of our additions are too timely to pass up on.

Here’s this month’s notable changes:

Additions

• Cyber Security – PANW (+1.5%) and CRWD (+1%)
• Tech – MSFT(+1%), PWR (+1.5%)
• Staples – ATD (+1.5%), DOL (+1%)

Deletions and subtractions

• Small Caps - FCGS -2.5%
• Bonds – PMIF -5%
•  

As always, if you have any questions or comments – let me know!
​
Much love to you and yours,

​Lucas Paulino

Investment Advisor

RBC Dominion Securities

200 Bay Street, 25^th Floor, Royal Bank Plaza - South Tower

Toronto, ON M5J 2J2

Office: 416-842-4027 | Cell: 416-984-9865

Take comfort in the knowledge that your capital is being managed the way your friends complain they wish their capital was managed. The ultimate compliment is a referral to peers, friends & family.

About the Top & Tail Focus List

The Focus List is a model and NOT a real investment account. For any readers interested in a full list of positions and/or Monthly Performance, they are available upon request. No individual should act on this as investment advice, please consult a professional. The Focus List does not take into consideration taxes, or income requirements.

Note that the contents of this memo are all my thoughts, and not the views of RBC Dominion Securities. As well, no part of this content was AI-assisted or created.