Yesterday, the U.S. Federal Reserve hiked their key interest rate by .75% to a range of 1.5 – 1.75%. This was the largest single increase by the Federal Reserve since 1994 and equity markets are down on the perceived uncertainty of how this will affect the economy and how much more rates will go up. The fear is rising rates will slow the economy enough to induce a recession and with that, perhaps a further drop in the stock market. The Federal Reserve Chairman, Jerome Powell, stated that their intention is NOT to cause a recession but that is what the markets fears right now.

Perspective is helpful in times like this. If they double the key rate from here, you will have a rate of somewhere between 3 and 3.5%. This is hardly onerous and very low historically speaking but the bond market is down and this is causing all borrowing costs – including mortgages – to go up in both Canada and the US. This is causing the housing market to cool and economic activity to slow. This is what everyone wants. The view of RBC – and I agree with it – is that inflation will moderate and settle somewhere above the 2% rate that we have become accustomed to in the next couple of years. 

It’s difficult, if not impossible, to predict how these rate hike cycles will go but I think it is fair to say, they tend not to go smoothly. As of June 1, our list of 7 U.S. recession indicators had none pointing to recession. I am not predicting that there will be no recession. I am simply pointing out that despite the turmoil in the markets, we are not seeing the signs – yet. 

So what if we do have a recession? What do we do and how will the markets react? Below is a chart that shows how the markets have reacted to recessions since 1948:

My takeaways from this are as follows:

1. For the 6 months prior to each recession, the markets were actually up leading into it about half the time. 

2. During the recession, the markets were up about half the time.

3. There was only one instance where the markets were NOT up one year after the recession ended.

4. The 3 and 5 year returns following a recession can be extremely good.

At the risk of sounding like a broken record, market disruptions like we are experiencing right now are opportunities. My advice to clients today is if you have spare cash or money that you can invest with a 3 to 5 year view, now is the time to start putting it to work. If you don’t feel comfortable investing all at once, dollar cost average by putting in a bit at a time. In the meantime, I will do my best to take advantage of what’s going on.

 

If you have any questions about this or anything else or just need some reassurance, don’t hesitate to reach out to me.