Market Comments:

December 04, 2023 | Nick Hamilton


Over the past 20 months, the proverbial ‘boogie man’ has most certainly been inflation and the interest rate increases which have totaled 5.25% over the same period. This, in addition to the Russia/Ukraine Conflict, also added to negative sentiment. Most of this uncertainty as well the government efforts to slow economic spending and rein in inflation, occurred in 2022 and dislocated prices in every market including real estate. In 2023, we had seen some rebound and the trend for inflation has been coming down but negative sentiment became compounded with the recent Hamas/Israel conflict. The months of August, September and October were challenged also when central bankers, didn’t increase interest rates further, but instead issued blanket ‘hawkish’ statements that rates may have to stay ‘higher for longer’. This sent an uncertain message to markets in Canada and the U.S. around interest rate expectations and weakness came back to the markets until we could see a material improvement in the pace of inflation. As we began November, U.S. and Canadian Inflation numbers came in quite soft- showing that the interest rate policies were having their desired effect. Since, then, Markets have been quite improved. This improvement is not only because the pace of inflation is slowing towards the 2% level, but also because economics have remained reasonably strong. This is especially true in the U.S. and less so in Canada. The risk of recession has been the other variable with rates having moved up so much. For the time being, this risk appears to be low in the U.S. and probably a medium risk in Canada given our household debt levels and sector concentrations in financials and resources. This reaffirms the importance of being diversified across investments in one’s portfolio- which we always promote.

The general takeaways here are that Inflation appears to be headed towards the desired 2% level and this direction is currently positive for North American Markets (equities and bonds). Once we firmly arrive at 2%, the government policies around interest rates should become more tame and accommodative for ongoing economic growth and stability for all markets. Should you want to understand this topic further, there is a good article from Capital Group on the progress of inflation getting to 2% and it would be a good read which you can access if you click on the link below:

On the topic of China, I would have some additional comments. Since 2021, China has (as we know) remained highly restrictive with their efforts to contain COVID and this has proven to be problematic for allowing their economy to re-accelerate. With China being the #2 economy in the world (second to the U.S.) this has been another factor which has kept certain assets suppressed in value- the price of Oil would be a good example and the demand for base metals much of which ties into Canadian economics. Canadian debt loads I feel can be managed over time and with falling inflation, interest rate pressures relating to debt should also go down over time.

More recently, as it relates to inflation and expectations around interest rate policy, we have seen evidence that the central bankers outlooks and plans may be ready to pivot. Fed Governor Christopher Waller commented that interest rates could actually be cut when inflation reaches 2% so as to slow its deceleration. This would be important to maintain a healthy rate of inflation at the target 2% and not have deflation emerge. Most importantly this signals that interest rate cuts would not only come on the heels of trying to avoid a recession or responding to economic growth that might suffer under too restrictive a policy. This would be good news for many parts of the market- but especially those that are interest rate sensitive such as financials and income producing equities. This would also be especially positive for Bonds and their future returns.