The equity rally continued across the major regions for the second quarter of 2023 despite continued central bank tightening and building pressure on consumer and corporate financial wellbeing. Bonds were not so lucky, falling modestly in the second quarter as inflationary pressure persists in most major economies, increasing expectations that interest rates may stay higher for longer.
Stretching out the backward-looking view to one year shows some very strong double-digit returns for equity markets. It is worth noting that 12 months ago, the mood for equity investing was quite desolate with almost unanimous predictions of an impending severe global recession. At this point, that would make just about everyone WRONG! Making investment decisions based on short-term predictions is always a bad idea and this is just another reminder that acting impulsively can be harmful to your wealth! We would encourage everyone to read our recent blog post GICs: The Worst Investment Ever?, which highlights another common bad investment idea that we are asked about regularly. By extension, High-Interest Savings Accounts (HISAs) fall into the same category as GICs.
Before we get too carried away, crediting central banks for skillfully avoiding recession, we acknowledge that the battle against inflation is not over. Inflation in many regions is still unacceptably high and central banks still have the resolve to continue hiking interest rates. Employment growth is positive-but-softening, and consumer financial conditions continue to deteriorate as the cost to service increasing debt levels is giving rise to higher delinquencies and missed payments.
As we outlined in our Q1 2023 Market Commentary, “consumer financial hardship” is a natural final stage for an economic downturn, but despite the accelerating warning signs, we have yet to see this materialize to any significant degree. This means that there still could be some potential for equity market volatility in the near term before central banks change course to restore calm. We expect that bonds will be a stabilizing factor in client portfolios. Yields are significantly higher than they were just 18 months ago across the entire yield curve, improving the potential for enhanced income and price appreciation returns. The last time that interest rates peaked at extreme levels back in the early 1980’s resulted in 40 years of abnormally high bond returns – we believe that we are approaching a scaled down version of that same scenario.
Wishing everyone a safe and happy summer!
Here is a recap of market performance as of June 30, 2023*
|Asset Class||Market Index||Quarter||1 Year||3 Years||5 Years||10 Years|
|Fixed Income||FTSE TMX Canada Universe Bond||-0.69%||3.15%||-3.75%||0.65%||2.06%|
|Canadian Equity||S&P/TSX Capped Composite||1.10||10.43||12.42||7.62||8.43|
|U.S. Equity||S&P 500 ($Cdn)||6.32||22.68||13.50||12.44||15.45|
|Int’l Equity||MSCI EAFE ($Cdn)||0.66||21.84||7.89||4.51||7.82|
* Source: Morningstar. Performance annualized for periods greater than 1 year.