Updated: Jan 28
Good news for the economy is usually bad news for stocks and bonds. That's because money managers have already anticipated the recovery and are now staring down the barrel of more conservative monetary and fiscal economic policies in the years ahead.
A rocky start for financial markets was all but expected (see RIGDEN FINANCIAL OUTLOOK 2022 - blog post), nevertheless, it's always surprising is how quickly the markets discount prices to reflect long-anticipated headwinds (and tailwinds) when they finally do. It's a herd effect and usually overshoots up, and down. In this case, the headwinds are anticipated rate hikes to combat inflation and increased regulation of the tech giants, give or take the possible conflict in Ukraine and oh yes, the pandemic!
I expect this year may continue on this path of "consolidation" or "building a base" but still end on the upside. Here's why:
Much of the inflation effects are based on the strong pandemic stimulus and supply chain issues, which are now receding. This could lead to a long period of stable interest rates, which is usually good for stocks and bonds. Rates might not rise as much as the market anticipates, and soon the asset prices will reflect the end of the inflation scare.
The demographic trends that led to the long period of low-interest rates remain in place. You can lead a baby boomer to the showroom, but you can't make them spend.
Many of the tech giants that have powered the stock market rise are well-stocked with cash, more integrated into mainstream usage than they ever thought possible at this stage thanks to the pandemic, and growing real earnings at an impressive pace. The spectre of regulation for these companies is not new and already reflected in their prices.
The advice for investors remains the same - stick to the no-idea approach, meaning invest as much as possible as if you have no idea what's going to happen in the short run - because no one really does. A balanced growth portfolio with periodic rebalancing is all one needs.
Regarding Mortgage Rates
On the mortgage front, Benjamin Tal, a senior economist at CIBC, says he believed the market has already priced in six rate hikes by the end of the year - that is a 1.5% rise in prime rate to 3.95%. That's quite a lot! If you are in a variable rate mortgage at prime -1% ( i.e. 1.45% at the moment) this could bring your mortgage rate up to where the 5 year fixed rates are now. I do not expect rates to rise much higher than this, and I expect the long-term average to hold steady and possibly even decline from there. But no one knows for sure.
If the Bank of Canada makes six .25% rate hikes, this will make many variable rate mortgage holders nervous. So if you think you might be troubled by it, this is the time to lock in your five-year fixed rate. Note that this means you will be volunteering for a much higher rate in advance! A less defensive option might be to keep your variable rate but voluntarily increase your payments now. Feel free to book an appointment to review your mortgage situation.