Winter 2022 Market Update

Private Wealth Market Update

Since our update in September, we have seen a considerable rebound in most markets, with the Canadian and U.S. indices up over 5% in November. This was a nice reprieve from the markets in the late summer/early fall. For many though, the most significant recent change affecting daily life was the drop in the price of crude oil. Not only will it help lower headline inflation, it will also improve the perception of inflation through the gas pump. As of this writing, the price of oil (WTI) is approaching its value at the start of 2022.

The most important news related to the future state of our economy, was the recent action taken by central banks in North America. The Bank of Canada moved their overnight rate by 0.50% (50 basis points), last Wednesday. It was the seventh consecutive increase, dating back to early March. During the last 9 months the rate has risen from its effective, lower boundary of 0.25% to 4.25%. The U.S. central bank followed suit yesterday and raised their overnight rate by 0.50% as well. However, it wasn’t the interest rate hikes that created the headlines, but rather the comments that came with the rate hikes.

On this side of the border, Tiff Macklem, Governor of the Bank of Canada indicated that a pause in rate hikes was a possibility when he said, “But we recognize that we have raised interest rates rapidly and that their effects are working their way through the economy. In other words, we are moving from how much to raise interest rates to whether to raise interest rates.” The widely held belief is that interest rates will reduce demand to match supply. Furthermore, reducing and eliminating rate hikes at the appropriate times will allow inflation to be mitigated without pushing the economy into a recession.

Whereas, in the U.S., Jerome Powell painted a much more hawkish picture for the American interest rate policy and projected another 0.75% increase in rates at some point before the end of 2023. This was the first official hint at policy divergence between the 2 central banks which immediately put pressure on the CAD dollar.

Also, more U.S. inflation news emerged last week with the Producer Price Index (PPI) release. The PPI measures inflation at the wholesale level. Producer prices rose 0.3% in November and 7.4% for the 12 months ending in November. In October, the 12-month PPI increase was 8.1%. The PPI began 2022 over 10% and had exceeded 11% for four months (March to June) before moving downward during late summer and autumn to its current level.

Secondly, consumer sentiment is hovering near historical lows. This often corresponds with buying opportunities in the markets – especially in the bond markets. Given the substantial rise in interest rates this year, we are seeing volatility in bonds that we haven’t seen in nearly a decade. However, as outlined in the article “Demystifying Three Bond Myths During Rising Rates”, despite some of the general myths investors have with bonds in a rising rate environment, we are viewing this as a buying opportunity.

How high are interest rates?

According to StatsCan the average interest rate for a 5-year fixed term mortgage in September 2022 was 5.64%. This rate is about 2½% higher than one year earlier. Mortgage rates have not been this high since January of 2009.

However, it is important to understand that the last decade and a half have experienced some of the lowest mortgage rates in the last half-century. Thirty-five of the last 50 years have seen higher rates than current mortgages, but not lately.

From January 1973 until August of 1996, the rates charged for 5-year fixed mortgages were over 8%, except for a brief 5-month stretch in 1993.

The recent rise of 2½% in mortgage rates adds $10,000 in interest annually on a $400,000 mortgage, which is $833 per month. Whereas, during the past 50 years, interest rates on mortgages peaked in August of 1981 at 20.78%. This would equal an equivalent increase of $5,833 in additional interest from recent levels, on a $400,000 mortgage!

None of this ancient history makes today’s increases more palatable. Also, let us be clear, this does not undermine the importance of finding a healthy balance of debt relative to your income. However, putting some context around the recent rate hikes will help you make proper financial decisions in the future.

Looking Forward to 2023! (Pun intended)

The geopolitical environment will likely continue to occupy the markets’ attention in 2023. There will be some common questions asked as we head into the New Year – Will we see progress towards a peace agreement between Russia and Ukraine? Will China ease off on it’s very strict zero-COVID policy? What are the consequences of major shifts in relations between major oil producing nations? In our opinion, when it comes to making investment decisions, investors are sometimes better off ignoring geopolitical issues which are often distractions to long-term planning. It is true, the current nuances are overriding influences on commodity prices, which are key to inflation and to our daily lives. However, the good news is that the recent interest rate hikes across most major economies, has stabilized inflation from a demand standpoint. We should see this trend continue in 2023, but nevertheless, the situation remains precarious on the supply side of things. We hope to have a better sense of direction on this as we get more concise answers to some of the questions on the above.

One thing is certain: a key success factor in 2023 will be our ability to remain nimble, as market participants, in a rapidly changing environment. For clients whose investment horizons span years, this should not be confused with the ultimate driver of success in the long term: the ability to stay the course in periods of turbulence. Rather, it means we as investors, need to tactically adjust as the year plays out.

We at Cox Private Wealth look forward to continuing to work with you and your families, as we move into 2023! Happy Holidays from myself, Christine, Tamara and the rest of our Cox Financial Group team!