In our featured economic commentary this week, we discuss the move in global bond yields which has been noticeable of late, and why it has some investors concerned. We’ve also included a podcast from Stu Kedwell, Co-Head, North American Equities, where he shares key insights from RBC Global Asset Management’s Investment Strategy Committee.
This week’s update also includes a few other interesting articles and resources:
- Early 2021 tax tips
- Globalization 2.0: The RBC Schulich Enterprise Forum Examines Global Opportunities for Canadian SMEs
- Elinesky Schuett Online
Thank you to everyone who joined us this week for our online event, Mental health and resiliency in a time of change, featuring RBC Olympian Tyler McGregor. We look forward to sharing the video replay in one of our upcoming weekly blog posts.
Wondering what’s next? We have posted all our upcoming events on our special events page. In this week's blog post, we have included your Save the Date for the upcoming online event celebrating International Women’s Day on March 10. We hope that you can join us!
As always, we end our weekly blog with a few good news stories from in and around our community.
Your economic update
Equity markets were generally flat over the past week. The more noticeable action occurred in the bond markets, where an increase in yields has gained steam of late. This left investors wondering whether they should be reassured as it’s another sign of growing confidence in the economic growth outlook, or instead concerned as it may foreshadow some inflationary headwinds which could prove problematic for equity markets. We discuss this more below and provide an update on the virus front.
North America continues to see a meaningful decline in infection trends. In Canada, the seven-day average rate of new daily infections fell over the past week, with the figure now standing at close to 2,900 new daily cases, versus the 3,500 from a week ago. Many provinces and territories experienced declines, with the exception of Manitoba and Newfoundland. The latter has been noteworthy and should serve as a reminder of why health officials across the country remain so cautious. The province entered a lockdown over the past week after officials confirmed that the “UK variant” of the virus is responsible for the province’s recent outbreak. Meanwhile, in the U.S., the seven-day average rate of new daily cases fell to nearly 60,000 versus the 95,000 from the prior week.
Bond yields on the rise
Global bond yields have been moving higher for a few months after the lows reached last year, but the increases of late have attracted much investor attention.
Bonds are debt instruments, whereby borrowers pay a recurring amount of interest before ultimately repaying a lender (an investor) at a future date. Many investors buy and hold bonds, or invest in fixed income products like mutual funds or ETFs that do so, as part of a well-diversified portfolio. As with stocks, investors can both buy and sell bonds that they no longer want to hold. When more investors want to sell rather than buy bonds, the prices decline. A bond yield represents the interest income relative to the price of a bond. As the price of a bond falls, its yield rises, and vice versa.
Stocks and bonds have been negatively correlated through much of the past decade, and through other periods as well. This means that as one moves up, the other moves down. In recent months, bond prices have been under pressure (bond yields are rising), suggesting there are more sellers than buyers – That in itself is not surprising given the current backdrop. The prevalent view that a durable economic recovery will fuel robust earnings growth for stocks has likely contributed to investors shifting some of their exposure away from defensive asset classes, such as bonds, into riskier assets, such as equities. In other words, the move higher in bond yields may simply be further validation of the growth recovery that investors expect to arrive soon.
However, the move in bond yields has been noticeably sharp in recent weeks and broad based, with yields increasing across the globe. This may suggest that some investors are growing anxious about future inflation. More specifically, some may be questioning whether the combination of an eventual opening of economies, massive fiscal and monetary support from governments and central banks, and pent-up demand from consumers and households could lead to sustained inflationary pressures going forward.
In general, inflation is a key risk for bonds and fixed income assets as it can erode the principal, or value that is repaid upon maturity of the loan, but it presents a risk for stocks too. Such a scenario may force central banks to shift their stance and raise interest rates earlier than otherwise expected. Stock prices can be very sensitive to the level of interest rates, particularly when valuation levels are elevated as they are today. The potential for an earlier than expected increase in interest rates would be a new and meaningful headwind for stocks. As a result, any large and sustained move higher in inflation could present a risk to both stocks and bonds.
We understand the rationale above, but are less concerned at this time. Inflation will undoubtedly rise this year as a function of an economy normalizing as it moves from partially to more fully open. Moreover, supply chain bottlenecks will exacerbate the upswing. In the US, the Federal Reserve has repeatedly indicated that it is very willing to tolerate a rate of inflation above its long-term target, at least for a little while. We expect other central banks to remain similarly accommodative. The more interesting question will be whether the pricing pressures that surface this year will prove to be temporary or persist into next year. Investors will have to wait to find out. In the meantime, the strong earnings growth anticipated to begin in the later part of the year should help to offset some of the concerns around rising bond yields and inflation.
Insights from RBC GAM’s Investment Strategy Committee
In this podcast, Stu Kedwell, Co-Head, North American Equities, shares key insights from RBC GAM’s Investment Strategy Committee. He discusses the outlook on the economic rebound, noting the vital role vaccines can play. Stu also explains his thoughts on the expected course of interest rates.
You can listen to the podcast online: Insights from RBC GAM’s Investment Strategy Committee
Early 2021 tax tips
When the end of the year approaches, many individuals place a greater focus on tax planning to minimize their income tax liability. Beyond the end of the year, however, there are some areas of tax planning that often get overlooked. For example, there are tax planning strategies that may only be available early in the new year.
With that in mind, this downloadable PDF article summarizes some of the strategies that have deadlines in early 2021: Early 2021 tax tips
SAVE THE DATE: International Women’s Day
Wednesday, March 10, 1 – 2:30 p.m.
We are excited to host our 3rd Annual International Women’s Day event on Wednesday, March 10. This event will be hosted on WebEx.
This year, our panelists are:
RSVP early using the link below!
Globalization 2.0: The RBC Schulich Enterprise Forum Examines Global Opportunities for Canadian SMEs
The 6th annual RBC Schulich Enterprise Forum featured a panel of leaders in business, education and government affairs. Through incisive questions, the panel explored the trends of 2020, opportunities for Canadian SMEs, and the risks that must not simply be overcome, but embraced in order to thrive.
You can read the full article online: Globalization 2.0: The RBC Schulich Enterprise Forum Examines Global Opportunities for Canadian SMEs
Elinesky Schuett Online
Have you missed one of our weekly blog posts, or was there an article that you were interested in reading again? You can find our full library of articles here: Elinesky Schuett Private Wealth Management Blog.
You can also connect with us on Facebook! We share articles focused on wealth, information about events in our community, and other interesting links, videos, and podcasts on our Facebook page. Find us online at Facebook.com/elineskyschuett.
Each week, we like to end our blog post with a few good news stories from in and around the community. We hope that they brighten your day!
- Pandemic brings a resurgence in local birding interest
- Students create virtual valentines cards for healthcare staff at Guelph General Hospital
- County unveils takeout tool/map to encourage support of local businesses
- Chefs at closed Guelph seniors' centre feed hundreds through COVID-19 pandemic
- Milton group hopes to collect 100 selfies for International Women’s Day
As always, we are available to connect with you personally. Please don’t hesitate to contact us at 519-822-2024 or firstname.lastname@example.org.