Page and Associates Ltd.

Family Wealth Management

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Short Term Pain for Long Term Gain

In the wake of the Bank of Canada’s surprising the market with a 1.00% hike of its overnight rate, CIBC Deputy Chief Economist Benjamin Tal provided a 4 minute video of his outlook on inflation, interest rates and the economy, and how investors should view these developments.

Key points:

  • Inflation should not be our main concern, because there are forces that will bring it back to more moderate levels. We should be more concerned about the cost to the economy of getting it back down.
  • The Bank of Canada’s goal is not to prevent recessions, but to limit inflation expectations to avoid a destructive wage-price spiral.
  • There is a 40-45% chance the bank will hike rates more than it needs to and cause a recession. They have signaled they want to go from 2.5% up to between 3 and 3.5%, but the difference between 3% and 3.5% may be the difference between a slowdown and a recession.
  • Inflation is a lagging indicator and usually peaks 4 to 6 months after the start of a recession, but no central banker will resist increasing interest rates when inflation rates are high.
  • Every recession in the past 40 years (except Covid) was helped – if not caused – by central banks hiking rates higher than they needed to.
  • There is still a good chance they won’t overshoot this time, because the significant increase from Covid-era lows are already starting to be effective at curbing demand, and there is still lots of strength to support growth.
  • So the rate hikes are probably already slowing growth, and if we do end up in a recession, it should be short and mild because
    o We have record high job vacancies
    o Consumers are sitting on about $300 billion in excess cash
    o The housing market is undersupplied and should support growth for years
  • Covid job losses were mostly lower income, higher earners took advantage of low interest rates to buy housing, so we borrowed some growth from the future
    o 20-25% home price declines would not be surprising
    o Rents did not rise during the pandemic, but they are rising now
    o Construction costs have risen faster than condo prices, so this sector is slowing now, but will rebound once supply and demand are back in balance
  • Equity markets have already priced in a lot of the bad news, and may have priced in more interest rate hikes than will be required.
    o If you have limited time horizon, equities are still risky
    o If your time horizon is 2-3 years, there are a lot of good opportunities out there.

Link to Video: https://link.videoplatform.limelight.com/media/?mediaId=3d73878551b043c7a33bd5f0ccbf09f9&width=540&height=321&playerForm=LVPPlayer&embedMode=html&htmlPlayerFilename=limelightjs-player.js&orgid=7e36bf0095db492cb2c8179d58eb0e29

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Bank of Canada Increases Overnight Rate to 2.5%

Today, the Bank of Canada surprised markets with a 100 basis point (1%) increase in its target overnight lending rate to 2.5%. (Press Release: Bank of Canada increases policy interest rate by 100 basis points, continues quantitative tightening – Bank of Canada).

Markets had been expecting another 0.75% increase based on the bank’s comments in May that it expected the neutral rate (neither stimulative nor restrictive to economic growth) to be about 2.5%, but that it would re-evaluate this target based on inflation and other statistics. Inflation has remained persistent in the face of ongoing supply chain disruptions, Chinese COVID lockdowns, and the war in Ukraine, and job vacancies remain at record highs without sufficient labour force to meet the demand surge after this year’s re-opening.

The Bank of Canada said this week that the neutral rate may need to go to 3-3.5% to balance demand to available supply, and the economy was strong enough to absorb the interest rate increases without causing a recession, so it wanted to ‘front load’ the rate increases to reduce inflation pressures immediately, and avoid even higher targets being needed in the long term. We should therefore expect a further rate increase at the bank’s next meeting September 9th, and at the next US Federal Reserve meeting July 26-27.

While the bank does not believe the higher rates will cause a recession, they do expect economic growth to slow. Still, their expectations are for reasonable growth rates of 3.5% this year, 1.75% in 2023, and 2.5% in 2024. Because inflation measures price changes from past levels, they expect about 8% inflation readings for the balance of the year, but a return to 3% by the end of 2023.

Bond markets had anticipated further rate increases so their yields and prices had already adjusted before the announcement. Top GIC rates are now over 4% for a 1-year term, and top daily interest deposit rates of 1.3% may see an increase in the coming days.

Video summary: Monetary Policy Report – July 2022 – Bank of Canada
Full Report: Monetary Policy Report – July 2022 (bankofcanada.ca)

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Recoveries Beat Bear Markets

Empire Life’s blog post of June 22 provided an interesting analysis of past periods of market contractions over 20%, and subsequent recoveries. One notable chart shown here:

The chart makes it clear that expansion phases usually last longer than contractions, and have a larger impact. The article compares this period with the 1970-1985 period of peak inflation and interests rates, noting similar depth and duration of corrections about -23% over 6 months, and recoveries of 55-70% over the following 18 months. Those recovery phases produce returns well above the market average.

Will investors see an environment of low inflation and interest rates similar to the past two decades or something closer to the inflationary environment five decades ago? Perhaps the answer is “somewhere in the middle”. But, here are a few things to remember:


• In either case and as history has shown, staying invested has proven to be a beneficial strategy for the long-term investor.
• Adding to your investments, particularly after large market contractions will likely help expedite your portfolio’s recovery.


Full Article: https://blog.empirelife.ca/blog/corrections-what-we-can-learn-from-the-past

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Resist the Urge to Time the Market

The past trading week went down as the worst week for the TSX since March 2020. The S&P500 benchmark officially ended down 20% from its prior peak in December as the US Federal Reserve hiked its key overnight rate by 0.75% for the first time since 1994. And the media is stoking fears of further declines and possible recession. It is times like these that emotions take over and has investors asking “should we sell to avoid further declines?”

What we do know from history is that the best market days are clustered in with the worst market days and being out of the market for these best days significantly impacts long term returns.

Source: https://ci-arena.ci.com/od/bb0dfeb6

Also, most stock market gains happen shortly after a bear market. Even after the 2008 Great Financial Crisis, most major benchmarks had regained their prior highs in 2 – 3 years.

Source: https://ci-arena.ci.com/od/48cf0671

Investors who exit the market during a bear market risk missing this rebound. Missing even 12 months of the post-2008 recovery would have significantly reduced their returns over the next 12 years.

Source: https://ci-arena.ci.com/od/fea210a9

It is important during periods of volatility to stick to the plan you created with your advisor. This plan incorporates your long term financial goals along with your near term cash flow needs and risk assessment, and will help you through this market as it has done for many investors in the past.

You can call us anytime to review your objectives and make sure your portfolio allocation is appropriate and consists of high quality portfolio managers.