You’ve heard me say this plenty all year – the US economy (and associated job growth) is strong and well - well enough that the US Federal Reserve is very likely to begin raising the overnight benchmark rate to above zero - for the first time in over 7 years.
Yellen has been hinting at a rate hike after a string of impressive growth figures (including this morning’s release of 211k job gains in November) and this week she told Congress that “economic conditions are falling into place for policymakers to raise interest rates” when they meet in two weeks’ time - as long as there are no major shocks that undermine her confidence. The market reacted modestly this week in anticipation of a likely rate hike and while nothing is for certain, let’s talk about what this is going to mean for you and for your portfolio.
From a high level, a rate hike confirms that the US economy is strong enough for the Fed to 'pull back the reins' before the economy gets away like a run-away horse. Those of you who are more seasoned, may recall the late 80's where central banks were waging a war with inflation (the level of prices increasing and the associated fall in your purchasing power). In an effort to tame double-digit inflation, the central bank drove interest rates higher and higher – resulting in mortgage rates topping out at 18.45%.
Aware of history liking to repeat itself, Yellen says that even after the first increase, rates will still be at very low levels, which should encourage more borrowing by consumers and businesses. While the role of the Fed has changed over the past 100 years, its mandate now is to simply 'maintain reasonable inflation' and ensure 'full employment' - both within margin to warrant this increase and any future increases.
So, a strong US economy = stronger US dollar and continued growth on the US side of your portfolio.
In Canada, the story is a little different. While our economy is expected to perform better in 2016 (relative to the challenging year we’ve had in 2015) headwinds from a reduction in resource spending (e.g. less drilling for oil & gas, and the follow on impact) suggests that the Bank of Canada needs to be accommodative to our economic growth prospects before being in a position to 'pull in the reins'.... recall that the Bank of Canada most recently lowered rates to help jump start growth and confirmed this week that the low rates would hold steady.
Not raising rates at home isn’t necessarily a bad thing. It continues to encourage spending at home and from a macro level, Canada is one the few developed countries that identifies as a net-exporter meaning that it benefits from lower rates which tend to lead to a deprecating currency; therefore making our goods and services that much more attractive from a global consumer perspective.
- a mediocre outlook on Canada = continue to diversify beyond our Canadian borders to see growth in your portfolio – if you must invest patriotically, look for good quality Canadian companies poised for sector specific growth or those who have a global reach based on their operations.