With the weather warming up and a clear shifting of the seasons, our team at Financial Literacy Counsel would like to highlight market activities that have taken place since the New Year. We discuss recession delays, where the federal budget meets interest and inflation, and rising equity markets.
Macro Update: Prepare for Rain
Recession forecasts have been delayed by Russell¹ and Fidelity², with Vanguard³ maintaining its position that major developed economies will experience it by the end of the year. While the exact timing isn’t clear, there is a consensus on the expectation of it being mild. This reduces the likelihood of more tightening in Canada¹. Fidelity’s charts showing negative earnings growth expectations² is an indicator that we are continuing to move through the business cycle towards recession territory.
Those living in Vancouver may be accustomed to seeing forecasted rain be pushed further into the week, extending the current bout of dry weather. Eventually, the rain does arrive and you will want to have an umbrella when it does.
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Hot Topic: Interest, Inflation, and the Federal Budget walk into a Bar…
Budget 2023 will deliver new, targeted inflation relief for the Canadians who need it most; stronger public health care, including dental care for millions of Canadians; and significant investments to build Canada’s clean economy. At a challenging time in a challenging world, there is no better place to be than Canada.”
The Honourable Chrystia Freeland,
Deputy Prime Minister and Minister of Finance ⁷
On April 12th, the Bank of Canada announced that they will be maintaining the interest rate at 4.5%⁴. With March inflation dropping to 4.3%⁵ and the expectation that it will continue falling to 3% this summer⁴, the bank appears to be content with the current progress. However, they do not expect to reach their target of 2% until the end of next year⁴. Given this, interest rates will likely remain elevated for the remainder of the year, with the potential for additional increases.
In the U.S., Vanguard projects a peak policy rate of 5.5 – 5.75% for this year³. Still, Russell does not expect Canada to match this, despite the dollar depreciation¹. Earlier this year we saw the collapse of Silicon Valley Bank and continue to hear murmurings of US banks facing difficulties, which can be attributed to rising rates. In Canada, the stress lies more with the average person, due to the higher levels of household debt¹.
Chrystia Freeland made a timely presentation of the 2023 budgetary policy, emphasizing its efforts to ease the inflation discomfort of Canadians, particularly the middle class⁷. This includes a small, one-time grocery rebate for most. A more significant change is a dental care plan to be rolled-out to Canadians by the end of 2023. Parents with children in post-secondary should also note that the RESP withdrawal allowance will increase to $8,000 to help cover higher living expenses. The full Budget 2023 may be found here.
Asset Update: Fixed on the Long-Term
In commentary for the S&P Dow Jones Indices they note that the S&P500 index was up 7.50% at the end of the first quarter of 2023⁶. This is welcome news after a challenging year for investors, and hints that the markets are digesting the possibility of a recession. Still, it has not been the smoothest ride and we expect that volatility will persist over the next year as we watch for the full effects of interest rates.
Last quarter, we highlighted the return of fixed income. With trouble in the U.S. banking sector, Fidelity notes that fixed income may be better valued². It continues to be a favourable diversifier and can help to reduce volatility.
Sticking to purely equities may still help you reach your goal in the long-run, but let’s think about life in Vancouver again. If you know there will be a drizzle on your walk, do you want to keep wearing your cotton sweater, or do you want to swap it for a raincoat? You will get to your destination either way, but the latter will provide a more comfortable experience.
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Summary: Packing your Umbrella
We have said it before and we will say it again, this is all part of a cycle. The recent inflation data does show that the continued discomfort comes with the hope for better weather in the future. However, with the improving equity markets, Vancouverites should remember that May can lend itself to a false summer, before bringing back the rain.
If you have already diversified your portfolio, read about further steps you can take to weather the storm here and be sure to contact your advisor with any questions. Think of it as packing your umbrella!
The comments contained herein are a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. This article was written, designed and produced by Financial Literacy Counsel, a registered trade name with Investia Financial Services Inc., and does not necessarily reflect the opinion of Investia Financial Services Inc. The information contained in this article comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any securities.
Mutual Funds and ETFs are offered through Investia Financial Services Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Mutual funds are not guaranteed, their values change frequently, and past performance may not be repeated.
Sources:
[1] Russell Investments. (Apr. 2023). 2023 Q2 Global Market Outlook: LONG AND VARIABLE LAGS. https://russellinvestments.com/-/media/files/ca/en/insights/global-market-outlook/2023-q2-gmo-full-report.pdf
[2] Fidelity Investments. (Apr. 2023). Quarterly Market Update: Second Quarter 2023. https://institutional.fidelity.com/app/literature/presentation/9883196/second-quarter-2023-quarterly-market.html
[3] Vanguard Research. (Apr. 10, 2023). Uncertain but navigable conditions: Vanguard weather. https://www.vanguard.ca/en/investor/insights/vanguard_weather
[4] Bank of Canada Media Relations. (Apr. 12, 2023). Bank of Canada maintains policy rate, continues quantitative tightening. https://www.bankofcanada.ca/2023/04/fad-press-release-2023-04-12/
[5] Bank of Canada. (accessed on Apr. 25, 2023). Key inflation indicators and the target range. https://www.bankofcanada.ca/rates/indicators/key-variables/key-inflation-indicators-and-the-target-range/
[6] Silverblatt, Howard. (Apr. 2, 2023). U.S. Equities Market Attributes March 2023. https://www.spglobal.com/spdji/en/commentary/article/us-equities-market-attributes
[7] Government of Canada. (Accessed on Apr. 25, 2023). Budget 2023: A Made-in-Canada Plan: Strong Middle Class, Affordable Economy, Healthy Future. https://www.budget.canada.ca/2023/home-accueil-en.html