On Wednesday the Bank of Canada did the right thing and increased the overnight rate by a full 1%. Many borrowers and homeowners will immediately face higher interest costs. Home owners with fixed rates may face increased rates and costs down the road, when their current mortgage fixed terms expire. Central banks increase rates in the attempt to cool the economy and inflation. The Bank of Canada surprised most everyone and has brought out the big guns. Market watchers now say that the Fed in the U.S. will follow suit with a 1% increase.
On MoneySense, here’s more on the Bank of Canada overnight rate and why it’s rising at the fastest pace in decades.
Rate concerns continue to stalk markets after the Bank of Canada surprised by hiking its key policy rate to 2.5% from 1.5%. In the U.S. the annual rate of inflation jumped to 9.1% cent in June, raising speculation that the Fed – which raised rates by three quarters of a percentage point at its last meeting – could follow suit later this month.
The market now thinks the Fed will folllow suit. Pricing on Fed funds futures now gives more than 80% chance for a 100 basis point hike at the next FOMC meeting, due by the end of July.
The strong Dollar
On world markets, the U.S. dollar index, which weighs the greenback against a group of currencies, rose a fifth of a percent on the day to 108.50, according to figures from Reuters. The index is up 13% so far this year.
Remember a Canadian will get a currency boost on U.S. holdings and dividends, should you not hedge.
Recession forcasts …
Here are a few charts that show the strength of the U.S. Dollar.
Look out below – Canadian real estate
And on the Canadian housing front. The psychology is crumbling. It will not be hard to break the back of the Canadian real estate market. I offered some thoughts on real estate in my latest for MoneySense. Will a real estate collapse help wannabe home owners?
Earnings season is underway
Cogeco Communications Inc. reported a 5% increase in net profit to $100.3-million. The Montreal-based company says profit attributable to shareholders was the equivalent of $2.16 per diluted share, up from $2.01 per share or $95.7-million a year earlier. Revenue for the three months ended May 31 was $728.1-million, up 16.6 per cent. The results were released after the close on Wednesday.
Earnings season in the U.S. is lead by the big U.S. financials. JPMorgan had a few swing and misses on the earnings and revenue side; they suspended share buybacks.
Banks on both sides of the border are preparing for tougher times ahead.
Stay the course
These are tough days and months for investors. In my latest post I had suggested that slow and steady wins the race. We need to have an investment plan, and we need to stick to that plan like Gorilla glue. Stock market corrections and recessions are par for the course for investors.
I have long suggested that a recession might come, could come. And since it was the very tragic invasion of Ukraine that pushed us over the edge I posted this –
Here’s a very good chart that shows the path of bear markets and recessions.
Another theme common on this blog and within my writings on MoneySense is that retirees might consider making their portfolio more defensive. Also, that U.S. stocks were terribly expensive, especially tech stocks. The tech-heavy Nasdaq has fallen by more than 30%. Canadian stocks are holding up much better than U.S. stocks, especially Canadian dividend stocks.
Dividend stocks for recessions
Barron’s offered a very good post on defensive dividends for recessions, from Citi research. Of course, dividends are less volatile compared to share prices, even or perhaps during recessions.
Ben Snider, a senior equity strategist at Goldman Sachs, points out that during the 12 U.S. recessions since World War II, the median decline in dividends paid by S&P 500 companies was just 1%. In five of those recessions—1949, 1974, 1980, 1981, and 1990—there was no decline, he says. Goldman calculated those figures by comparing the previous four quarters at the start of each recession with the last four quarters at the end.
Even in the sharpest and deepest recession in modern history, S&P 500 dividends only fell by 3%. Canada has the most durable dividends on the planet. That said, in the recession of the great financial crisis of 2007 through mid-2009, S&P 500 dividends dropped by 24%. That is the worst decline since the 1940’s.
In the recession that unfolded in 2001, S&P 500 dividends fell by 6%, the second-worst drop behind the 2007-09 downturn.
You can do better
And you can do better than the market when selecting dividend stocks. I have long studied the dividend aristocrats (25 years of dividend increases) and the dividend achievers ( 10 years of dividend increases).
During the finanicial crisis of 2008-2009 the ETF (VIG) that tracks the dividend acheivers in the U.S. experienced a 13.7% dividend decline vs 24% for the market. VIG also held up better (less decline in price) than market. It was modestly superior to the S&P 500 for the retiree (and for retirement funding). Some credit goes to the more sustainable dividends and the lesser drawdown. I suggest the dividend achievers in the ETF portfolio for retirees. Vanguard’s Canadian High Dividend ETF has also been superior for retirees. That ETF (VDY) is also suggested in the ETF retiree post.
Vanguard offers U.S. and Canadian dollar ETF options for the achievers index.
The dividend aristocrats held up very well in the dot-com crash of the early 2000s. This is incredible.
My personal U.S. stock portfolio holds a nice mix of aristocrats and achievers. Those dividend indices will help you find quality companies and more sustainable dividends. They pair will with the Canucks.
I recently Tweeted on my defensive line (important for retirees) for Canadian and U.S. accounts.
One can certainly better-shape their portfolio for retirement. That said, the core ETF balanced portfolios can also work very well in.
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Hi Dale, As TD, RY, BNS and BMO have recently “tanked” it is a waste of cash to just keep pouring $$’s into a black hole. As a retiree even the dividend’s recieved are a pathetic reward for the use of one’s risk investment dollars. The general response to this is just keep holding on and the market will recover in a couple of decades. What a joke! Why not admit it is a situation that will not recover for many years ? Cheers, Chris Howes