In our economic update this week, we discuss why investors shouldn’t fret about interest rate hikes, at least in the year ahead. We’ve also included the latest video update from Eric Lascelles, Chief Economist with RBC Global Asset Management, An update on North American economies, U.S. business cycle, central banks, and more.
This week, we have included the second video in the new series, Uncomplicated advice for executors, featuring The Wealthy Barber, David Chilton, and Bryan and Sarah Baeumler, from HGTV Canada’s Island of Bryan. There are a few surprising estate laws in Canada – find out more in the video below, Three Will and estate planning facts that will surprise you.
Did you know that November is Financial Literacy month? Along with our economic update links and The Wealthy Barber video, we’ve included a few other interesting articles in keeping with the financial literacy theme:
- What’s the relationship between the stock market and the economy?
- Teaching your kids about financial literacy
- Keep your money safe from fraud and scams.
As always, we end our weekly email with a few good news stories from in and around our community.
A sense of optimism, fueled by the third quarter earnings season, has propelled many global equity markets to new highs in recent weeks. Reassuringly, the breadth of the market move has been healthy, with many stocks across a range of sectors participating in the advance. Although already anticipated, the other notable development was confirmation from the U.S. Federal Reserve that it will begin to reduce its asset purchase program, which was one of several measures put in place at the onset of the pandemic. This week, we discuss the shifts in central bank policy, the credit environment, and the impact of increasing interest rates on the equity market in greater detail.
Shifts in central bank policy
It has become common practice for monetary authorities to communicate major shifts in policy well in advance of implementation. As a result, investors knew that a “tapering” announcement from the U.S. Federal Reserve was coming. Nevertheless, this decision adds to a growing list of central banks, including the Bank of Canada, who have begun to wind down some of the monetary stimulus put in place over a year ago.
Some central banks, in the emerging markets in particular, have taken their approach a step further and have begun raising interest rates in recent months. Those actions may also be on the horizon in the developed markets. The Bank of England recently indicated it may raise rates sooner rather than later given confidence in its economic recovery and the persistence of inflationary pressures. In North America, investors are coming to the realization that interest rate hikes may be less than a year away. In fact, current market expectations are for close to four interest rate increases in Canada over the next year, beginning as early as spring 2022. Meanwhile, in the U.S., investors are expecting rate increases to begin in the summer, with a few anticipated before year-end. While those forecasts may prove to be a tad aggressive, it’s clear that interest rates may be higher a year from now.
Interest rate hikes and the credit environment
Historically, most major equity market declines have corresponded with economic recessions in the U.S., the world’s largest economy. Furthermore, most U.S. recessions have been preceded by periods of tight credit conditions characterized by consumers and businesses that are less inclined to borrow because of high interest rates, as well as banks that are reluctant to lend. That is undoubtedly not the environment we are in today. Moreover, it’s hard to imagine those conditions forming next year given that the cycle of interest rate hikes will only be starting to get underway and interest rates will still be quite low relative to economic growth, which should remain well above average given the ongoing reopening. In other words, it may take much more time and numerous interest rate hikes to create the kind of circumstances that would define a more restrictive credit environment.
Equity markets and projected interest rate hikes
Investors don’t seem that bothered by the prospects of higher rates. And history would suggest they shouldn’t be. Since 1958, there have been 18 cycles of interest rate hikes in the United States. In the months leading up to the first rate hike, equity returns in Canada and the U.S. have generally been positive, and in some cases quite strong. This is reasonable as many of these periods were characterized by robust economic growth and healthy corporate earnings trends. Not surprisingly, equity returns were more volatile around the time of the first interest rate increase, but as the months went by the economic and earnings trends seemed to reassert their influence on equity returns.
The interest rate regime is set to change in 2023, but rates should still remain relatively low and credit conditions relatively favourable for borrowers. At some point in the future, the cost of financing will become more prohibitive, consumers and businesses will push off their spending plans or projects, and banks will become more particular about who they lend money to. We believe we’re still a ways away from that happening and that is one of the factors that keeps us constructive on the outlook ahead.
An update on North American economies, U.S. business cycle, central banks, and more
Watch the video online: An update on North American economies, U.S. business cycle, central banks, and more |
In this video, RBC Global Asset Management’s Chief Economist, Eric Lascelles, reviews recent developments around economic trends. He looks at a quickly advancing U.S. business cycle and shares his growth outlook. As inflation heat rises, he notes central banks' hawkish stance and updated views. Finally, he discusses persistent supply chain issues as we head into the holiday season.
Three Will and estate planning facts that will surprise you
The Wealthy Barber with Bryan and Sarah Baeumler discuss surprising estate laws in Canada. This video is part of Uncomplicated advice for executors video series created in collaboration between RBC Wealth Management Royal Trust and David Chilton.
Watch the video online: Three Will and estate planning facts that will surprise you
What’s the relationship between the stock market and the economy?
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It’s natural to expect the path of a country’s stock market to closely track that of its economy. But in reality, it’s not that simple. In this article, we’ll explore these two forces in more detail – and what they mean to investors:
Teaching your kids about financial literacy
Whether day-to-day or more large-scale in nature, financial decisions exist in so many aspects of our lives. From earning and saving to budgeting and investing, here are some age-specific financial literacy tips for kids, teens and young adults.
Read the article online: Teaching your kids about financial literacy
Keep your money safe from fraud and scams
Read the article online: Keep your money safe from fraud and scams |
With more people spending time online, Canadians have become easier targets for scammers. By staying up-to-the-minute with your money, you can help spot and act upon suspicious activity quickly.
Community Corner
Each week, we like to share a few good news stories from in and around the community. We hope that they brighten your day!
- St. Mary students recognize veterans, 100th anniversary of the poppy
- Gallery: Lest We Forget: Guelph remembers (23 photos)
- Awesome autumn: Guelph Jazz Festival's 'Autumn Echoes Series' kicks off on Friday
- Arab Women's Society hosts successful fundraiser
- Guelph woman aims to take 100 walks before 100th birthday
- Erin’s Window Wonderland returns to in-person event November 19
- Everyone's a winner as Guelph Humane Society lottery winners give money back
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or elineskyschuett@rbc.com.