Written for Lawyers Financial by Chris Goldie.
For investors, the first half of the year has unfolded quite differently than expected. On the back of an ugly 2022, when stocks and bonds slumped and inflation and interest rates surged, the January consensus was duck and cover. A recession was widely advertised, with the only question being whether it would hit in the first or second half of the year. Job cuts started piling up and GICs were very, very popular.
Seven months later, things are looking better. Or are they? In a glass half full/half empty world, it might be a good time to get a second opinion on your retirement savings strategy.
The good news
2023 has been a mixed bag so far. Yes, stock markets and the economic outlook have improved, but with caveats. In the US, a thick slice of the 19% year-to-date gains in the S&P 500 are in the seven tech stocks at the top—Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla. Strip out "The Magnificent Seven," though, and the rest of the index shrinks to single digits. Canadian equities also gained, but more modestly. With no AI stocks to light a fire, the S&P/TSX Composite Index rose 5.7% for the year by July 30.
There’s also better than expected news for jobs. Our unemployment rate has hardly budged, sitting at 5.5%, up slightly from the very low 5.0% at the end of 2022. A recession—or even the sense one is coming—can push a lot of people out of work, but employment actually rose by a quarter of a million during the first four months of 2023.
The confusing news
But over here, in the “what do I owe” economy, the interest rate hikes kept coming, even as inflation slowly started losing altitude. The Bank of Canada (BoC) has lifted its key interest rate three times this year, from 4.25% in January to 5% in July—and commercial banks have matched those moves. The reason the BoC kept ratcheting up was inflation wasn’t moderating fast enough, partially because consumers just kept buying stuff despite the price of everything flying high. Confused? You’re in good company. As Bank of Canada Governor Tiff Macklem said after the BoC rate rose to 5% in July, “We have been surprised by the ongoing strength in demand in the economy and persistence of underlying inflationary pressures.”
Even in the US, nobody knows quite what to make of it all—at least the markets don't. In late July, the US Federal reserve bumped its key interest rate to 5.25%, a 22-year high. Many predicted a downturn since that's what traditionally happens when the Fed tightens its belt. But then Fed Chair, Jerome Powell, announced that the Fed was no longer forecasting a US recession. Wonderful! And on the back of that (apparently) good news? The markets... barely moved.
But, overall, not bad, right?
Well, this is where it gets a little complicated.
The not so good news
The catch is that interest rates are a lagging indicator, meaning the full impact of rising rates takes time to really hit our wallet. Most of us feel the impact of credit card rates almost instantly, but fixed rate mortgages don’t change overnight. That might spell danger for new homeowners and for the overall economy. What we're seeing now—all this semi-surprising chugging along—owes a lot to, well, the money we owe.
And a lot of us jumped all over those insanely low (as in 50 years low) mortgage rates dangled in the middle of the pandemic. According to CIBC, close to 50 per cent of mortgages outstanding today were taken out in 2020 and 2021, with many being for five-year terms. So, by 2025 and 2026 that debt will be rolling over at higher rates, squeezing more dollars out of households already cramped by other debt (credit cards…) and higher prices for pretty well everything.
But there’s already some creaking in the system. In June, RBC Economics said that Canadian consumer delinquency (when you miss a debt payment of any kind) rates are ticking up. Worse, Statistics Canada reports that the percentage of Canadian household disposable income that’s going to debt payments could hit record levels later this year. To put this in context, the figure translates to $1.85 in credit market debt for every dollar of household disposable income. Just 25 years ago, in 1998, it was about $1.04. This matters profoundly for Canadian families. But it also matters for the economy, which increasingly relies on Canadians to spend money most of us just don’t have.
Companies will also face refinancing challenges after loading up on cheap money during the pandemic. If corporate revenues are flat, which they have been for many companies, higher interest rates bite into the bottom line. When that scenario persists, employers start looking at cutting jobs.
Unless rates start coming down.
Rate hikes have helped slow the rate of inflation, just as central bankers intended. Does that mean interest rates won’t have to stay high for much longer? Possibly. The challenge is that while inflation has helped push wages up—a good thing when everything costs more—higher labour costs for employers can also mean…higher prices for the goods and services they sell. And let’s not forget about rent. It’s soared in many communities and those increases may be sticky because of another factor, population growth. The Canadian population has ballooned by 1.2 million in the past 12 months. A July report by TD Bank warns that if that trend continues, interest rates could stay high because so many more people could fuel demand that outstrips supply for goods and services and, yes, housing.
To sum up: We’re in a better spot than we were in January but plenty of questions hang over the economy and therefore the investment markets.
Perhaps now’s a good time to get a second opinion on your retirement savings strategy?
It can’t hurt.
Get a second opinion on your retirement savings
CBIA/Lawyers Financial is a not-for-profit organization for lawyers by lawyers. That gives us the freedom to support you in ways that promote your well-being—not our bottom line. Book a pro bono financial planning meeting today, and make sure your retirement plan is clear (even when the markets aren’t).
Book a financial planning meeting now
Chris Goldie is a financial writer and editor.
