Outlook

For the first time in over a decade, the Canadian 5-year bond has a yield of over 3%. In this month’s article, David analyzes what substantially higher interest rates mean for both savers and borrowers, as well as the impact of inflation.

We wrote last month that much of the hoped-for recovery would depend on earnings reports for the 2nd quarter, and the forecasts that companies would make about the outlook for the second half of the year. We are happy to say: so far, so good. David analyzes the strong month of July in this quarter’s newsletter.

From June 8th to June 16th, the S&P 500, the index of the most valuable traded companies in the United States, dropped 520 points, or 12.5%. About $4 trillion of market capitalization was vapourized in just over a week. That is, by any measure, a staggering amount of money. It is equal to about $12,000 for every person in the United States, or about $560 for every human on earth. The proximate cause was the increase in interest rates in all the developed countries. Central bankers around the world acted in concert to combat inflation by quickly raising rates. In the last six months, the yield on 2 year US government bonds has risen almost exactly 2.5%, from 0.65% to 3.13%. Rates to borrow money have risen equally quickly. The interest rate for a standard mortgage in the US has risen from 3.1% to 5.3% in the same period.

During May, the outlook for interest rates and inflation continued to rise, consumer demand weakened, supply chain constraints appeared to be getting worse, and the Ukraine/Russia conflict showed no sign of ending. Despite headlines that are certainly not improving, the S&P 500 ended the month exactly flat, and the technology-heavy NASDAQ was down just 3%. This result was encouraging because it suggests that investors are no longer reacting as harshly to bad news. As Barry noted during our Shaken but not Stirred presentation in April (which can be viewed here), stocks start going up far in advance of any actual improvements in the situation.

Usually, when the stock market is having a bad period, as it certainly is now, investors can take some comfort in the fixed income part of their portfolio. They know that returns on fixed income are lower over time, but at least the capital is protected and yields are predictable. Usually. The last six months have seen the biggest drop in the bond market in history. In Europe, where government-issued debt has traded with yields at or below zero for the last three years, losses have been in the trillions of dollars (or Euros). In North America, losses have been on a smaller scale, but are still very substantial.

LIONS AND TIGERS AND LOTS OF BEARS We all follow our own paths towards our financial goals. Sometimes we appear to be on the yellow brick road where the sun is shining, the sky is blue and there are no [...]

What Matters There are lots of things we, as professional investors, cannot control. We cannot make Russia behave, although we wish we could. We cannot make the economy stronger, although it seems to be doing that by itself. We cannot [...]

Many of our clients are concerned about the world situation, the stock market and the impact on their investments. This video will let you know how we are viewing the current moment, and what we intend to do (and not do).

January was the worst month for U.S. stock markets since the start of the pandemic in early 2020. While the TSX was buoyed up by strong commodity prices, the S&P 500 fell by 5.3% and the NASDAQ fell by 9%.  It is not unusual for markets to retrace gains made in strong periods, and there is no doubt that since the markets bottomed in April 2020, this has been a very strong period indeed. From trough to peak, the S&P 500 doubled, the NASDAQ rose 139% and the TSX rose 92%.  Really, we have no business complaining about a bad month! However, it is certainly worth while looking at some of the factors behind the bruising start to the year.