The Steele Group's Q3 2023 Newsletter
Stalling disinflation (opposite of inflation, where prices decrease period-over-period), rising bond yields, and an uncertain global economic outlook set the stage for a choppy market during the third quarter, despite solid economic and corporate activity. At the end of Q3, many investors expected that global policy rates had reached their peaks and could ease in the coming quarters. That said, the impact of the abrupt departure from the ultralow rates era could still weigh on financial conditions in the quarters to come.
The primary driver of portfolio growth in 2023 continues to be U.S. equities. Despite strong gains for U.S. large cap stocks on a year-to-date basis, the 2023 market rebound remained narrow. As the chart below illustrates, the 10 largest stocks, concentrated in the technology and communication sectors, accounts for the bulk of the market’s gains since earlier this year.
On U.S. inflation, pressures that tend to be more transitory, such as supply-chain disruptions, continued to fade in recent months. However, categories where price increases tend to be more persistent account for the bulk of current inflation drivers. The charts below illustrate that CPI Services have fallen faster than labour cost inflation, providing concern that either further core decreases in inflation will be challenging, or the economy is weakening faster than many expect.
It is important to note that the goal of higher interest is to slow down consumer spending thus lower economic total activity. While the concept of lower economic activity is typically considered a negative, it is the requirement to see an end of higher inflation. This process to bring inflation down to its 2% target will take time in the U.S. as the average American tends to lock into 30-year fixed rate mortgages. Currently around 80% of U.S. consumers are holding fixed rate mortgages with rates below 3%. This is what is allowing continued economic growth in the U.S.
On the Canadian side, annual inflation rate edged down to 3.8% in September. Analysts had expectations for inflation to remain at 4%. Unlike the U.S., Canadian consumers are feeling the effect of higher interest rates more rapidly given the average shorter mortgage term. Thus, the Canadian economy is slowing at a faster pace. It is becoming more likely that Canada may head into a recession sooner, and we see why the Bank of Canada has decided to pause additional interest rate increases until more data comes out.
At this late stage of the interest rate hiking cycle, it is expected that lower risk portfolios which hold fixed income will start reflecting the higher rates that new bond issuers must pay. While the past 15 years have not been easy for conservative investors due to low interest rates, these higher interest rates will reward long-term savings going forward.
For additional commentary on the recent interest rate movements and the impacts it is having on the U.S. and Canadian economy, Mario Mota from The Steele Group held a discussion with Stephania Vielma, VP and Strategist out of PIMCO Asset Management Newport Beach, California offices. To watch a recording of this conversation please click here
The discussion with Stephania Vielma was focused on high level U.S. and Canadian economic impacts from the current interest rate environment. In the coming months, The Steele Group team will host a mix of events with local realtors and mortgage brokers to provide greater insight on the impact the higher rate environment is having on individuals dealing with local housing and mortgages.
Looking forward to the final months of 2023, we want to provide a reminder that this year brought a new investment account titled the FHSA (First-Time Home Savings Account) and an increase in the TFSA annual limit from $6,000 to $6,500. If you have yet to make your TFSA contribution for 2023 the increased contribution room will carry forward to 2024, however the FHSA contribution room does not carry forward unless you have an active account opened before December 31, 2023. Please contact our office directly to set up a FHSA.
Should you have any questions on year-end planning, as always, we are here to support you in achieving your financial goals. If you require any assistance or have any questions please do not hesitate to reach out to Cliff, Mario, Mark, or our TSG team.