Rising interest rate is no longer rumor or contestable, it is happening in full force. The Canadian bond universe returned a loss of -7% this quarter. The end of pandemic seems remote but living with it has become acceptable. And employees are in the driver 's seat for a change. This all seems like good news but then why is the stock market so volatile threatening a continued slide?
The answer may lie in global conflicts like the war in Ukraine, continuing trouble between China and USA, and the supply problems which started due to Covid and got potentially worse with Russian attack. Yet the performance of our Canadian TSX (+3.8%) has been the best this year so far. Our market is not as diversified as the US (-5.7%), so we should be careful making hasty conclusions. Most forecasters calling for a doom and gloom recommend buying oil and gold to prosper avoiding high growth tech sectors. History is not kind to investors who invest primarily in such resources.
When investors become nervous as now, they gravitate towards banks, utilities and telecom. This dividend paying bunch is doing well but not enough to compensate for the losses in technology stocks. This however may be a short term reaction if rates keep marching higher. Experts are quite divided on this issue. Some see global economic slowdown spilling into North America which would stop central bankers from further tightening or raising rates. Others forecast years of high inflation and higher rates.
Both camps make sense. It may turn out that the next few quarters will see higher inflation, growth and rates followed by a slowdown back into the Goldie Lock scenario of slow but steady growth bringing technology back into focus. This sector has been and will continue to be a solution rather than a problem.
Uncertainty like this makes investment decisions difficult and volatility high. Nimble trading may be required as 2022 unfolds.