Market Update: Navigating the current economic climate, considering GIC’s, and staying invested
How has the market performed so far?
We had a lot to cheer for in the first quarter of the year. Equities had good returns, U.S. corporate earnings were strong, and AI continued to excite. U.S., Canadian and global equities climbed steadily through January, February, and March to end the quarter with a fifth straight month of gains. U.S. and Japanese equities in particular posted record highs. Bond markets saw U.S. and Canadian yields rise through January and February on strong economic growth before moving lower at quarter-end after the Fed reaffirmed its commitment to cut rates. U.S. and Canadian markets did experience a modest correction in April, but this likely won't be the last correction of the year.
What economic factors have contributed to market performance?
- Markets have been laser-focused on inflation and rate cuts. The odds of a summer cut by the Bank of Canada (BoC) rose after a friendly April Canadian CPI report. On June 5, 2024, the BoC cut rates by 25 basis points to 4.75%, as widely expected. Governor Macklem said that they are more confident inflation is headed to the2% target, and that we can expect further cuts, while reiterating that the decision would be dependent on favourable data (inflation, employment, growth, consumer expectations).
- Middle East tensions also sparked a rise in oil prices, other factors to blame include OPEC’s decision to maintain its current production levels and the carbon tax increase in Canada on April 1st which further inflated pump prices.
- Canadian employment slowed, but the U.S. job market remained robust, with more than 300,000 new jobs created and the unemployment rate steady at 3.8%. Corporate earnings and the economy continue to be resilient.
- The upcoming US election has many investors wondering how the markets will react. While political headlines may at times cause short-term ripples in the market, long-term investment returns seem to be driven much more by economic fundamentals such as corporate earnings, interest rates, and other economic factors.
What does this mean for your investments?
As an investor, understanding the dynamics of the stock market’s relationship with the economy can help you digest economic news and stay focused on the long term. Economic news can be good or bad for your investments. However, what has a greater influence on markets is whether the news is better or worse than investors expected. For example, positive news about job numbers and the unemployment rate can drive up investor optimism that the economy is growing faster than expected. When economic news is far worse than expected, some investors respond by exiting the markets and seeking safety in cash. But history has shown that this often leads to missed opportunities. Consider the impact of missing the best 10, 20 and 30 days on the value of $10,000 invested in Canadian stocks over the past 10 years:
Market uncertainty can naturally cause panic and lead to poor investment decisions. Yet, by recognizing short-term market uncertainty for what it is, you can help ensure that you stay invested. Plus, investments are often cheaper when the economy looks grim – creating opportunities for investors who are willing to look to the future.
Should I buy GIC’s to avoid market uncertainty?
Since 1981, Canadian Fixed Income has historically outperformed 1-Year Guaranteed Investment Certificates (GICs) by an average of 3.65% per year. Our chart below, provides more insight into this comparison during periods of falling interest rates, rising interest rates, and all years:
Investors who are looking to invest in GICs, may want to consider the cost of locking-up cash, and the potential of missing out on opportunities in fixed income today.
How are we positioning your portfolio?
At Adamson Wealth Group, iA Private Wealth, we understand the importance of safeguarding your investments, especially during uncertain economic periods. That's why we want to highlight our proactive strategies to mitigate volatility and enhance your portfolio's resilience:
- Diversifying your portfolio - different asset classes and geographic regions perform differently through different market cycles. That’s why it’s important to avoid keeping your eggs in one basket, as the saying goes. By diversifying your portfolio, we can access the better performers while mitigating risk of being overly concentrated in those that lag.
- Utilizing dividend-paying securities - our model portfolios have a robust emphasis on dividend-paying securities. These investments provide you with a unique advantage: they pay you to wait out market volatility. By investing in companies with strong dividend histories, you not only benefit from potential capital appreciation but also receive regular dividend payments, offering a source of income even when markets are turbulent.
- Offering alternative solutions – we are actively incorporating alternative investments. Alternative investments have historically displayed low correlation with traditional stocks and bonds, making them valuable additions to your portfolio.
P.s. In our discretionary managed program, we can implement these strategies in a timely and efficient manner, so we will be encouraging you to transition to this platform at your next appointment.
Regardless of where we are in the market cycle, it’s important to keep a disciplined approach to investing and stay focused on your long-term goals. As always, our team is here to support you and answer any questions you may have regarding your investments. Your financial well-being is our top priority, and we remain committed to helping you achieve your financial goals.
This information has been prepared by Jessica Perry, who is a Wealth Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Wealth Advisor can open accounts only in the provinces in which they are registered.
iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
Alternative investments are not suitable for all types of investors, please obtain independent professional advise in the context of your particular circumstances.
*Insurance products and services are provided through Adamson Wealth Group Inc., an independent and separate company from iA Private Wealth. Only services offered through iA Private Wealth Inc. are covered by the Canadian Investor Protection Fund.
Sources:
NEI FlashReport – Bank of Canada Rates
PIMCO – Why Consider Fixed Income Over GICs Now?
Canada Life –Your Weekly Commentary – For the Week Ended May 24
