Stock markets climbed over the last three weeks but wavered in recent days as bond yields surged and investors switched focus to increasingly hawkish central banks. As a result, the global bond selloff continued while equities slumped over prospects of interest rates moving higher and faster than expected.
Global investors have fled the bond market this year, as skyrocketing inflation is forcing central banks to accelerate plans for rate hikes to try and cap rising prices. As interest rates and bond yields rise, bond prices typically decline.
Bank of Canada officials led by Governor Tiff Macklem are expected to raise rates again next week, quite likely by as much as a half percentage point to 1.0%, with additional half-percentage-point increases to follow at each of the Bank’s next three meetings as central bankers race to get ahead of inflation.
After a deep two-day sell-off, markets finished in the green on Thursday, finding some confidence that central bankers’ plans won’t stall economic growth.
Canadian Finance Minister Chrystia Freeland released a more prudent budget than expected on Thursday, keeping new spending in check and using a revenue windfall to help narrow deficits over the next five years.
The net cost of new measures -- including revenue-raising steps -- is estimated at $31.2 billion over six years; some economists expected that number would be closer to $100 billion. Cumulative deficits through 2027 will be $50 billion lower than forecast in a December fiscal update, with revenue exceeding projections by about $90 billion over that time.
The budget is a recognition by the Liberal government that more fiscal caution is needed given rising inflation and global uncertainties that are clouding the economic outlook.
Freeland delivered on a pledge to tax large banks and insurance companies, which will see a permanent 1.5 percentage-point-increase in their corporate income tax rate. Banks and insurers will also pay a one-time 15% surtax on income above $1 billion for the 2021 tax year. Those measures are expected to raise $6.1 billion over the forecast horizon.
As markets continue to react and adjust to changing conditions, a continued focus on your long-term goals remains the best course of action. Investing through a well-diversified portfolio has historically provided the best experience through a combination of goals-based returns and reduced volatility over time.
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Our Experts Say...
“The range of outcomes has widened and we are re-evaluating both risks and the market response to the next set of rate increases.”
IPC Chief Investment Officer
Over the past 10 years, markets are positive. Perspective is key. Markets do react to short-term increases in volatility – see the grey lines below – but the long-term trend is upward in the blue and red lines.
Source: Morningstar Direct. Growth of $100,000 shown. Total returns from Jan. 13, 2012 to April 7, 2022 in local currency. Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.