The past week offered more Canadian bank earnings. As expected we saw more softness, but the banks are hanging in there. I’ve updated last week’s Sunday Reads to include the recent earnings reports. And the big news of the week might have been the unexpected second quarter of negative growth for the Canadian economy. Is it the start of a technical recession, or deep recession? Who knows? But the rate hikes are going to work. It’s possible that this bad news might be seen as good news. And the rate hike cycle is likely on pause, for now. We have the recession watch on the Sunday Reads.
This post on Canadian Mortgage Trends points to Desjardin calling for a recession to last through the first two quarters of 2024. That post also touches on the state of the Canadian consumer and retail spending trends. Of course,more and more money is being used to service mortgage and other debt, leaving less for retail spending. That trend will accelerate as more fixed rate mortgages roll over in 2024 and 2025. Estimates suggests that on average, the higher mortgage rates will increase mortgage servicing costs by several hundreds of dollars per month.
Companies that operate in the world of discretionary (non essential) spending will take the hardest hit first.
My theme or observation has been consistent that the dark economic forces were present, but simply moving in slow motion.
The bond move
That Canada 5-year bond (that moves the direction of fixed rate mortgages) has been coming down. The bond markets suggests, or guesses, that rates will be coming down over time. Of course, that’s good for bond prices. As rates go down, bond prices go up.
That said, back in June of 2021, bonds were back. Though I added …
This week reminded us that stock and bond markets are more than unpredictable. And markets can react aggressively to the short term news and events. For those who need to manage the risks and volatility, I’d suggest that bonds can certainly still play a role. You might consider that bond barbell approach.
In that post I suggested that readers consider inflation protection as well. That bond rally turned out to be a big headfake. Inflation was not transitory and it took hold.
Bonds suffered up until present. Inflation fighting assets went on a tear.
The bond barbell approach
You might consider a one-two punch barbell approach, long and short.
- Short – manage interest rate risk
- Long – manage stock market risk
The Purpose Real Asset ETF (PRA.TSX) is up about 25% from that date, while oil and gas stocks (XEG/TSX) are up about 117%.
Adding inflation fighting assets helps us create the all-weather portfolio.
Cash is working hard
The upside of course when we use a bond barbell approach during a rising rate environment is that cash and GICs will pay handsomely. Here’s the recent GIC rate hikes at EQ Bank. We can also look to the ultra-short bond ETFs from Horizons – (CBIL/TSX) for Canadian accounts and (UBIL.U/NYSE) for U.S. Dollar accounts.
You can now get a real rate of return – a return above the inflation rate.
From Morningstar – how to use cash in the portfolio.
And if rates do move to a declining trend, it’s possible that the big dividend paying stocks in the telco and utilities space (including pipelines) will rise in price thanks to decreasing borrowing costs over time. REITs might also benefit.
But mostly, stocks in general enjoy a disinflationary environment.
More on the Canadian bank earnings
I updated last week’s Sunday Reads to include Scotiabank, BMO, National Bank and CIBC earnings. Here’s the Canadian banks’ earnings.
More Sunday Reads
At Tawcan, Bob is back with his first half of 2023 portfolio review, part 3. I am more than happy to read this from Bob …
As we move closer and closer to our goal of living off dividends, I think we need to continue to hold a mix of high yield low dividend growth stocks and low yield high dividend growth stocks. We plan to focus more on higher dividend growth stocks so we can continue to grow dividend income organically.
And total return for the win …
As much as dividend income is great and helps with an investor’s psychology, total return matters more in the long run. We want to collect dividends and have our capital grow as well.
Total return for the win!
Yup, more money (created in the accumulation stage) buys or creates more income in retirement. We are best to separate the accumulation and decumulation stages.
More money is more better.Dale
At My Own Advisor Mark asks if diversification really matters. Once again, we’d need to add inflation protection for true, or total diversification.
Let’s check in with Dividend Hawk for the earnings and top stock stories of the week.
At Findependence Hub, we look at low volatility investing.
Low volatility investing is the opposite of meme-stock investing. It’s about winning by not losing. Batting for singles and doubles, but not going for home runs and striking out. Keeping the ball in the fairway … and on and on.
That’s a very good description of low volatility and lower risk investing that many embrace by way of the Canadian Wider Moat stocks.
And here’s a good thread from our Twitter/X friend Dividend Daddy …
Here’s the weekend watching and reading from Banker on Wheels.
At FiPhysician, the portfolio size effect.
Martin Pelletier’s interview at BNN looks at the banks, the FED and some ETF likes including covered calls on banks and utilities.
I have a covered call post in the works. There’s nothing wrong with a modest use of income boosters in retirement, IMHO.
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