20 January, 2023

Weekly Update - Stocks Whipsaw after Positive Canadian Inflation News and Mixed US Data   

Stocks whipsawed between green (up) and red (down) during the week, sitting nearly flat in the US and Canada around mid-day Friday. Trading volumes on Monday were lower for Canada’s main index, the S&P/TSX, with the US markets closed that day. The run up mid week, from carryover excitement about the reopening of China and positive inflation numbers, was erased on Thursday in North America before a little spark was re-ignited as the week came to a close.

 

Canada received the ever-important monthly change in Consumer Price Index (CPI) number for December on Tuesday. As a reminder, CPI measures the change in price of a basket of goods over a period. The data reported that Canada experienced a year over year increase of prices by 6.3% in December. On a monthly basis, the index fell 0.6% in December, the biggest drop since April 2020. Tuesday’s report showed the rapid interest rate increases over the past ten months are starting to slow down price gains.

 

Although inflation remains well above the Bank of Canada’s 2% target level, the reported numbers are a positive signal pointing towards the BoC slowing rate hikes before pausing. Governor Tiff Macklem is likely to deliver one more hike on at the BoC’s next meeting on January 25 before pausing.

 

A pause in rate hikes for Canada is welcomed news because our economy tends to be much more interest rate sensitive than other countries around the world. The sensitivity generally has to do with the structure of our housing market and mortgages. Compared to the U.S., our mortgage contracts are much shorter, 3-5 years on average, and recently more Canadians have been choosing variable rates over fixed ones. Variable rate mortgages can be beneficial when interest rates are falling, however when rates are rising, the increased monthly mortgage cost can be detrimental.

 

Although Canada received good news this week, reports released in the US were mixed. Some data, such as U.S. new home construction and retail sales both falling, were positive because the Federal Reserve (Fed) wants the economy to cool off. On the flip side, U.S. unemployment benefits surprisingly decreased last week to its lowest level since September. What this tells us is the U.S. job market is still very strong and less people are filing claims to receive benefits while they’re unemployed.

 

Reports like the ones mentioned above are released periodically and used as a tool for market participants to gauge the health of the economy. All the reports being released recently have received extra attention as markets keep a close eye on central banks, like the Fed and BoC, and how they believe they will adjust interest rates in response.

 

As markets 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.

 

Short-Term View:

Stocks were negative after the excitement of China reopening wore off. Investors remain cautious as further rate hikes and challenged company earnings loom.

 

Longer-Term Thinking:

Sticking to your long-term plan through periods of volatility is central to investment success.

 

Logic Over Emotion:

Perspective is key. Focus on long-term goals and timeframes. Contact us to discuss any questions and concerns you may have.

 

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 January 13, 2012 to January 19, 2023 in local currency. Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.