The Markets
The TSX is down 2.8% for February and up 4.3% year to date
The S&P 500 is down 2.6% for February and up 3.4%
The NASDAQ is down 1.6% for February and up 8.87% year to date
The Canadian Bond Universe index is down 2.9% on the month and up 0.16% year to date.
Note the RRSP deadline for the 2022 tax year is March 1. Please do not wait until the last minute to e-transfer funds. If you bank at a bank other than RBC, there is a 2 business day delay in us receiving the funds; therefore today is the last day to transfer from another bank.
From our Portfolio Advisory Group
Volatility has resurfaced over the past month. It’s been most evident in the bond market, with yields having moved meaningfully higher (and prices lower), reaching levels seen in November of last year. The move on the equity side has been less pronounced, but the weakness still noticeable of late. The culprit? Renewed uncertainty and debate over interest rates. We discuss this and more below.
Global economic data through the first few months of the year has been reasonably strong, defying many expectations for a softening in activity. In normal times, this kind of a backdrop would be cheered by most investors. But, recent developments have fueled concern that inflation, while trending lower, may remain stubbornly elevated and force central banks to raise rates further in order to cool demand.
Meanwhile, policy makers have started to offer some conflicting signals. The Bank of Canada indicated it was likely to soon pause with its rate tightening, and wait to assess how the economy was faring. More recently, the U.S. Federal Reserve suggested it wasn’t quite ready to take such a break. Instead, it telegraphed the need to continue to raise rates to get inflation convincingly under control. The bottom-line: investors are reassessing rate expectations, which has fueled the recent bout of higher volatility.
We don’t have high conviction on precisely where interest rates ultimately land when the hikes end. Nor do we think it matters as much as some pundits would suggest. In our view, what is more important is to prepare portfolios for the potential scenario in which interest rates stay high for a long enough period of time to cause economic pain. Through history, most periods of rate tightening have ultimately resulted in slower growth, or outright recessions. We don’t expect this cycle to be any different.
We do believe investors have to be patient though as it may take some time to unfold. There are a few reasons why. First, consumers still have the wherewithal to spend. Cash balances remain elevated, although they are admittedly on a downward trajectory. Moreover, consumers remain very willing to spend and experience the kind of activities – trips, outings, shows, eating at restaurants, etc - they sorely missed during the pandemic period, regardless of cost.
Most importantly, history has shown that it takes time for higher rates to work through the economy. The Canadian housing market is a good example. Canadians with mortgages make up about 35% of the country’s households (another 37% are renters and 28% don’t have mortgages). Only a fraction of households (2%) have variable rate/variable pay mortgages that would see mortgage payments fluctuate with changes in interest rates. A larger share of households either have variable rate/fixed pay mortgages (10%) or fixed rate mortgages (23%), and neither of these see any change to payments over the term of the mortgage. In other words, the number of Canadian households that have been impacted thus far by higher rates over the past year may not be as large as one would think. The bigger challenge will unfold over the next few years as homeowners who either purchased a home or refinanced their home in the past five years may have to potentially refinance at much higher rates. In other words, it’s upon the refinancing that households will have a potential wake-up call and be forced to reassess and reprioritize their spending and saving.
The scenario above is not guaranteed to unfold exactly as described, but it’s one we have to be prepared for. The trajectory of inflation and interest rates clearly remain very important to the economic and investment outlook over the next few years. We’ll continue to watch with great interest and recalibrate our own expectations as things evolve.
Wealth Management
Tax packages have started to go out. Some clients may still have tax slips yet to be issued. If you have non-registered investments, the first page of our tax package will tell you what slips to expect.
RRSP contributions receipts are issued shortly after contributions are done, T4RIF slips are out.
I am sharing some resources we have on a Healthy Aging Video series.
Cost Care and Choice Care, cost and choice: What does your home transition plan look like? (rbcwealthmanagement.com)
Community Living as We Age Community living as we age (rbcwealthmanagement.com)
Dementia – prepare, plan and prosper Dementia: Prepare, plan and prosper (rbcwealthmanagement.com)
Client events
We had an informative event with two speakers from our Portfolio Advisory Group on the markets and the economy.
Some key takeaways, 2022 was a year when both stocks and bonds declined; in the past almost 100 years, this only happened 6 times and we have only had 4 occasions in the past 100 years where we experienced back to back down years (2000-2022 tech wreck/911) 1973-1974 (OPEC oil embargo), 1939-1941 (WW2), 1929-1932 (Great depression).
Summary comments – staying invested and staying disciplined in crucial to achieving long term objectives. Time in the market is more important than timing the market.
In the Community
I will be attending the Whitby Chamber of Commerce Connect Women event again this year on March 2.
I am volunteering on the Hearth Place Cancer Support Centre’s annual gala event committee again this year. I am also a gold sponsor. Please consider making a donation – we are looking for items for our silent auction table and bottles of wine for our wine bucket draw, and consider joining me at the event which will take place on April 15th at the Ajax Convention Centre. A reminder that Hearth Place serves all of Durham Region and receives no government funding. More information can be found here; https://hearthplace.org/events/gala/
Team Notes
I am on vacation the week of March 13-17. Mike will be in office and I will check emails once/day. Mike can be reached at 905-434-2657 or mike.twohey@rbc.com
Attachments
I have attached articles on the following;
*First Home Savers Account – coming in April.
*Relationship with Equities – Equity markets and the economy.