After whiplash of
a turnaround in most markets, Canada TSX up by 13.3% and US by 11.2%, the watch
phrase today is “sit, wait and watch” which is what the US federal reserve is
doing. That of course leads most other governments to stop talking about raising
interest rates and even thinking about cutting it.
It is
always dangerous to talk about “it is different this time” in stock market
investing but that seems to be what is being discounted now. After decades of
declining rates, we had an impatient outlook that the drop is over, and it must
be time for rising rates. Surely how much lower can it go? Many countries in
Europe and Japan are lending money at zero, even negative interest rates. This
hasn’t really happened before. We are in uncharted territory.
This disparity of what our linear thinking suggests versus what is happening is
because of an economy which has some with more money than they need while
others with barely enough for retirement. Higher rates help those who have
savings but not those who need money. This will only change slowly as the big
cohort of baby boomers age and slowly pass their wealth to the next generation.
Hard to put an estimate on how long this lasts but surely it will be decades
rather than years. So, we watch and wait before the return of what we know from
previous market movements. One economist believes requirement for more
mechanical stuff which used to be a major source of industrial growth may be
waning as we spend more time on our desks.
Bonds
which pay virtually nothing here and negative returns in some economies have
proven to still be a stabilizing asset. A balanced portfolio was much less
volatile during the December rout. A 2% return is better than losing value.
Desire for extra return or yield will add more volatility than in the past.
All isn’t negative. A slower growing economy may mean shallower recessions when
it comes. We are in the “lower for longer” regime again. Other than increasing
our fixed income portion of our assets, we are not changing our strategy.
A
quote from National Bank Financial latest report, 4 April 2019.
"... temporary
employment ─ which, like the yield curve, is a decent leading indicator ─ even
registered a quarterly decline in Q1. The other report, the household survey,
showed a large drop in employment driven by cuts in full-time positions. And
with full-timers often better remunerated than part-timers, one should not be
too surprised by the moderation in wage inflation, the latter dropping in March
to 3.2% on a year-on-year basis. The only reason the unemployment rate managed
to stay unchanged at 3.8% (despite sizable job losses in the household survey)
was the drop in labour force participation. All told, there are reasons for the
Federal Reserve to be cautious and remain in pause mode for a while.
"
