This week the Bank of Canada raised rates a full percentage point. They are bringing out the big guns to fight inflation. Will the Fed follow suit in the U.S.? – I asked in a post this week. In the Sunday Reads we’ll have a look at the cost of rate hikes and how that affects mortgage holders. We can see how rate increases cool down spending and the economy. This week’s offering also looks at GICs vs bond ETFs, REITs, oil and dividend portfolio updates.
All the major averages closed the week in the red. The Dow dropped by 0.2%. The S&P and Nasdaq fell 0.9% and 1.6%, respectively. Canadian stocks were down 2.8%. Canadian bond (XBB.TO) were up almost 1% for the week and are up 2% over the last month.
This week I penned – The Bank of Canada surprised markets by doing the right thing.
The cost of higher rates
Most Canadians with variable mortgages have static payments: as rates go up the monthly installment stays the same but less principal gets paid. But about 20 per cent of variable loans are not static — meaning each hike can add hundreds of dollars to a payment.
Here’s more on the rate increase courtesy of Rate Hub. You’ll also find mortgage calculators and posted rates for fixed and variable mortgages.
Every $100,000 someone holds in a variable rate mortgage will result in about $55 more in costs per month. Based on the Canadian Real Estate Association’s average home price of $711,000 in May, a variable rate of 2.7 per cent will result in monthly mortgage payments of roughly $2,845. At 3.7 per cent, the best mortgage rate available, those payments will total $3,168, an increase of $323 per month.
It will not be hard to break the back of the real estate market. That’s a lot of spending power removed from the economy.
The banks are feeling the rate-hike heat.
Here is the performance of the Canadian banks in 2022 and 2021.
I will keep an eye on the valuations for Canadian banks – stay tuned for future posts. Energy stocks continue to fall, I think that will also be a wonderful opportunity.
More Sunday Reads
Mark at My Own Advisor gives us the Weekend Reads – are we heading for a recession edition. Good post. And follow Mark on Twitter to see pics of The British Open (golf) from Scotland. What a great trip.
At Findependence Hub, Justin Bender delivers a very nice comparison and outline of bond ETFs vs GIC ladders.
And speaking of bonds, Bob at Tawcan offers Canadian bond ETFs for 2022. At some point in the future, bonds will be THE investment. Of course, we don’t know the timing. And perhaps we should not guess. Stick to your investment plan means sticking to (and with) your investments.
Rob at Passive Canadian Income crunched the numbers to give up his June update. Rob passed the $2500 mark for the month.
Did we just break $2,500? Bam! That’s one of those things you gotta pat yourself on the back for. Good job guys. haha Seriously though wow that feels good. 6 years ago we started this journey, we brought in 62 bucks in June 2016. If we can do it, you can as well. Maybe not this high, maybe way higher.
That said, many market commentators are suggesting that higher quality corporate bonds are worth a look these days.
More Making Sense at MoneySense
On stocktrades.ca, Mathieu Litalien offers up a few of the top Canadian REITs.
And of course, we always check in on the week in review at Dividend Hawk. You’ll find company reports and the read-worthy blog posts of the week.
And for some great south-of-the-border-reads – these are the goods. Included in that list was this – The risk of deflation is now greater than the risk of prolonged high inflation. I know more than one expert in the deflation camp. Of course, we simply don’t know what we are going to get. If investing is like a box of chocolates, it’s likely safe to say that we’ll get chocolates.
I want to emphasize that I don’t think this is a repeat of the 2008 financial crisis. The underlying housing dynamics are much healthier today than they were back then, but my baseline case continues to be slowing growth and disinflation with a rising risk of deflation.Cullen Roche
You might choose to be ready for most anything with a version of the new balanced portfolio.
Canadian oil producers at $70 oil
Canadian oil and gas stocks might be very profitable with oil at $70.
And while we don’t know where the bottom is for stock markets, a friendly reminder.
Accumulators want to be buying through the bear market. They are wonderful wealth-building opportunities.
Another inverted yield curve
An inverted yield curve is a warning sign of slowing economic growth, and it can be a recession indicator. But there’s no guarantee.
With few exceptions, recessions are preceded by an inversion of the yield curve, though not all yield-curve inversions lead to recessions.
My most recent articles for Seeking Alpha.
And smile …
Thanks for reading. You can follow this blog by entering your email in the subscribe area. No charge. 🙂
Cut The Crap Investments. Cut your fees.
You will earn a break on fees by way of many of these partnership links.
CANADA’S TOP-RANKED DISCOUNT BROKERAGE
Cut the Crap Investing readers can earn a break on fees at Questrade by way of that partnership link. At Questrade, you can buy ETFs for free.
Consider Justwealth for RESP accounts. That is THE option in Canada with target date funds that adjust the risk level as the student approaches the College or University start date.
RETIREMENT FUNDING PLANNING
The self-directed investor might consider the service provided by Mark Seed from My Own Advisor. He runs Cashflows & Portfolios where they will provide options for that optimal retirement funding strategy. That service is provided for a very reasonable fee.
If you do head to Cashflow & Portfolios, be sure to tell them Cut The Crap Investing sent ya 🙂
OUR SAVINGS ACCOUNTS
Make your cash work a lot harder at EQ Bank. RRSP and TFSA account savings rates are at 1.25%. You’ll find some higher rates on GICs, recently updated and increased t0 2.05% for short term offerings. They also offer U.S. dollar accounts. We use them, they have been awesome.
OUR CASHBACK CREDIT CARD
We make between $60 to $70 every month! And that’s on everyday spending. There are no fees with …
While I do not accept monies for feature blog posts please click here on the mission and ‘how I might get paid’ disclosures. Affiliate partnerships help me pay the bills for this site. That will allow me to keep this site free of ads and easy to read.
Kindly use the buttons below to share this post.