May 6, 2023
While 2023 has been a year filled with uncertainty in the stock market, I welcome the risk free rate opportunities that have surfaced behind GIC’s. cash ETFs and money market funds.
The uncertainty in the stock market has been caused by the central banks' rate hikes and their goal of bringing inflation back to their 2% target. In 2022, after 2 years of government's stimuli, low interest rates and supply chain challenges, inflation in both Canada and the US reached levels not seen in the past 40 years: 6.8% and 6.5% in 2022, respectively.
Both Central Banks, the Federal Reserve (“Fed”), and the Bank of Canada (“BoC”), have been open about the risks behind rate increases and although both hope for a “soft landing”, they also recognize that their actions will probably lead to a mild recession or a slow down.
“I would remind you that we actually need a period of weak growth. We need growth to be weak to let supply catch up and relieve price pressures” - Tiff Macklem, April 12, 2023
“These tighter credit conditions are likely to weigh on economic activity, hiring and inflation. The extent of these effects remains uncertain.” Jerome Powell, May 3, 2023
The reality is that it is very difficult to predict the actual impact higher interest rates will have; however, no matter what, business profitability as well as personal investments will likely feel the impact. Things like the challenges faced by Silicon Valley Bank, First Republic, and Signature Bank are just an example of what can happen not only to the banking industry but to the broader economy.
Therefore, during this time, I prefer to stay alert but cautious and use a more conservative approach when providing any advice on investment. Investment advice should always be tailored based on each person’s time horizon and personal goals; however, some overarching principles that could apply to many at this moment are:
Lean towards a higher % of Cash and Fixed Income than your usual split. The exact percentage is very personal but it should be directionally higher.
Take advantage of market upswings to increase your cash position by selling some investments. Given the volatility in the market, there will be days where it would make sense to adjust some stock positions and increase your cash reserve. Again, the specific stocks to sell will vary according to your portfolio goals and composition.
Consider GIC’s for fixed income assets. Even though the yield of GIC’s is lower than what it was 6 months ago, there are still CDIC insured banks offering 5% GICs at 1 year and even 4.6% for 5 years
Put your cash to work with high interest ETF’s or Bank money market funds. Depending on where you do your own trading, there are some good options. For instance, clients that trade with Questrade have access to Horizons CASH ETF; which at the moment is yielding 3.6% (risk free and liquid). The major banks are restricting trading of these ETFs but have created their own money market funds with similar or better returns. For example, clients who invest with TD are using TDB2914 / TDB8150 or those at RBC are using RBF2010 (and 2020, 2030, 2040) with returns of 4% or higher. The same goes for USD cash with each bank now offering their own funds yielding upwards of 4%. I understand these are not super high returns, but they are risk-free and liquid; and a significant increase over the 0.5% yields these type of funds were returning in the last couple of years.
I hope you found some ideas to think about. If you are interested in Financial Coaching either for planning or investing purposes, don’t hesitate to book a Free Consultation.
Claudia Soler
* Disclaimer: The information contained within this blog is for informational purposes only and it is not intended as a recommendation of the securities highlighted or any particular investment strategy; nor should it be considered a solicitation to buy or sell any security. In addition, this information is not represented or warranted to be accurate, correct, complete or timely. the securities mentioned in this blog may not be suitable for all types of investors and the information contained in this blog does not constitute advice. Before acting on any information in this blog, readers should consider whether such an investment is suitable for their particular circumstances, perform their own due diligence, and if necessary, seek professional advice.