After many weeks of (mostly) stock and bond market declines, this week offered some positive price moves. At least that was the case for stock markets. Bonds still continued their march down as rising rates and higher yields hurt bond prices. We’ve experienced the worst bond market, ever. To the rescue, comments from Fed officials raised the possibility of rate hike easing, or at least a path that holds rates steady in the near future. Investors are praying for a rate hike hiatus.
Bruised investors had the week to heal, or at least lick their wounds.
- U.S. stocks up 2.8%
- Canadian stocks up 1.8%
- International stocks up 1.3%
- U.S. bonds down 1.6%
- Canadian bonds down 1.6%
Borrowed from the Globe & Mail –
Some Fed officials have begun sounding out their desire to slow down the pace of increases soon, according to a Wall Street Journal report, and how to signal plans to approve a smaller increase in December.
San Francisco Federal Reserve President Mary Daly echoed that sentiment and said it’s time to start talking about slowing the pace of the hikes in borrowing costs and doing so should avoid sending the economy into an “unforced downturn” by hiking interest rates too sharply.
In addition, Chicago Federal Reserve Bank President Charles Evans reiterated his stance the Fed should get policy to “a bit above” 4.5% by early next year and then hold it there.
Talking nice
While there is no denying the Fed is serious about wrestling inflation to the ground, they appear to be worried about breaking too many things along the way. Central bankers around the world are hoping for (OK perhaps more praying/places of worship are busy again) a soft economic landing. That is, kill inflation without a double economic homicide – also killing the economy. If they can offer some hope to consumers and businesses that might help the cause, as inflation and recession expectations can be self-fulfiiling prophecy. We can talk our way into these events.
But in the end, as I often write, inflation is driving the bus and the central bankers are strapped in, on that bus. More than words, the actual inflation rate and pace of change of inflation will dictate where rates go.
Canada’s inflation, as sticky as maple syrup
We had an inflation report this week as was reported by Kyle Prevost in Making Sense of the Markets for MoneySense.
Overall, inflation is slowing down the attack, but food and shelter costs continue to surge.
Here’s the breakdown of a few items.
Combined, food and shelter were up 6.0% month over month and 8.6% year over year. Real estate prices continue to fall, but affordability is nowhere to be found. Real estate is closely watched and perhaps is the most interesting space. I have updated this post with September numbers …
The real estate affordability battle in Canada.
There’s much more work to be done on the inflation fight in Canada. That said, here’s a different way to frame the inflation watch.
Yes, current trends (if they continue) will bring down inflation, eventually.
Where will inflation land?
And speaking of interesting, here is a very good post from Russell Napier. He sees a 15 to 20 year period of elevated inflation and financial repression. Governments will be able to ‘inflate away’ their debt (as they did after WWII) and savers will be robbed.
According to Napier, financial repression will be the leitmotif for the next 15 to 20 years. But this environment will also bring opportunities for investors. «We will see a boom in capital investment and a reindustrialisation of Western economies,» says Napier. Many people will like it at first, before years of badly misallocated capital will lead to stagflation.
That’s a very good post and not at odds with my writings and personal opinion. At the same time we have to admit that we don’t know the future. We have to be ready for anything if we’re a retiree or near retiree.
Ready for whatever
Stick with me on Cut The Crap Investing, and I’ll do my best to get you through this, no matter what “this” turns out to be. Readers were prepared for the changing economic landscape. It was two years ago that I offered – looking to the Canadian energy sector for Canadian investors. Of course, oil and gas stocks are a wonderful inflation hedge. The index is up over 250% from the time of that post. I also offered up commodities in the new balanced portfolio and other portfolio options. Commodities offer the most reliable and aggressive inflation protection.
Big Canadian dividend payers were identified as a potential source of outperformance. You’ve also learned how to arrange certain types of stocks and bonds and more for various economic conditions. I recently penned – Our U.S. and Canadian stock portfolio outperforms when it matters.
Im March I suggested that the Russcession is coming! Who knows, but a recession of some sort seems likely (but not a guarantee).
Stick to the plan, assets are on sale
One month ago I asked, what are you buying?
Stocks and REITs and bonds are going on sale. We’re buying more earnings and yields. You can easily generate a 6% yield from Canadian stocks. Even the market index ETFs offer over 3%. Short term bond ETFs offer over 4%. U.S. stocks are getting more attractive. The higher yield VYM in the U.S. has a very attractive PE ratio (value) and a yield above 3%. The ETF has some more favourable sector arrangement as well with meaningful energy exposure plus a greater focus on healthcare, consumer staples, telcos and utilities (team defense).
Prices could get lower, or not. We don’t know. Market timing is impossible.
Stick to your investment plan. If you’re in the accumulation stage keep buying on a regular schedule. Be sure to invest within your risk tolerance level. Consider a chat with a fee-for-service financial planner.
It’s been a tough ride. But often, after the storm …
Maybe that stock market history offers some ‘hope’, or at least relevant perspective.
Thanks for reading. Feel free to reach out with any questions or concerns.
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“ Real estate prices continue to fall, but affordability is nowhere to be found.”
I hear this so much and it drives me nuts!
Affordability can be found! In my community the median home is all of 4X the median family income.
Don’t tell me affordability can’t be found. If you can’t find it, it is because you are not looking….
Now that I have that out I will also say that as well as BCE, I also added to my FTS holdings.
Still sitting on 10% cash. I have more shopping to do.