June 24, 2022
Although the last week of June saw a bit of a recovery, the main indices still finished around 4%-8% lower than May and between 10%-25% down vs. the start of the year.
June was indeed a difficult month for the stock market with both the Dow and the S&P tip toeing in and out of bear market territory. The main driver has been the increase in interest rates in both Canada and the US (as well as many other countries around the world.) As covered in “Ripple Effect”, higher interest rates can negatively impact companies earnings, discourage trading on margin, and divert investments from stocks to other fixed income options.
The increase in interest rates has served as the trigger to bring company valuations and stock prices down to a more reasonable level vs. the highly optimistic (many times speculative) level that stocks were trading at last year. In other words, I’m not assuming this drop to be temporary, and then, followed by a speedy recovery like what we saw in 2020. I see it more as the reset button that can bring the stock market back to annual growth more in line with GDP growth and historic P/E averages.
As mentioned in “The 2022 Game Plan”, I had a trading range in which I would start buying again. On June 15th the Dow hit the high end of the range. With that I filled all the positions that I’m interested in up to 20%. From there, I’d be buying in 10% increments every time the last price falls by 5%. The next time, I’ll be okay buying in “mass” would be if/when the S&P hits 3,440 or the Dow 28,000 (this means a drop of ~12% from their current levels).
In addition to buying stocks, I’m starting to build a fixed income portfolio by using GIC’s. From last post “Silver lining”, the interest rates have continued to come up and GICs are now paying between 3.75% and 4.6% per year depending on the term. I also heard that some banks are starting to talk about 5% for a 5-year GIC.
Over the last couple of months, I’ve studied more about buying GICs, and came across the GIC laddering strategy; which I’m interested in eventually using.
What is the GIC laddering strategy?
You split the money that you want to invest in GIC’s in 5 different buckets
You invest ⅕ in each of the GIC terms. In other words, 20% in a 1-year GIC, the next 20% in a 2-year GIC and so on, up until the last 20% in a 5-year GIC
As each GIC expires, you invest in a new 5-year GIC so eventually all your fixed income investment is in 5-year GIC’s; however, every year one of them expires and can be redeemed in cash or reinvested.
To note, with GICs, your money is locked in for the term of the GIC. Therefore, it’s important to keep this in mind and only invest cash that you are not anticipating to need for the duration of the GIC.
The current Central Banks interest rates are at 1.5% in Canada and 1.75% in the US. The next hike in Canada is expected on July 13th, and it will likely take the rate up to 2.25%. Experts say that the rates can reach between 3.5-5% next year. This will likely lead to higher GIC rates in the future; it seems worth to wait.
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.