Market View

Quarter 3, 2023

Q3 2023 Market Summary

Inflation is still the headliner. How does it affect our economy?

Canada’s inflation rate rose to 4.0% in August, up from 3.3% in July driven by higher energy, food, and shelter costs. The Bank of Canada’s inflation target range is 2.0-3.0%. In June 2022, the inflation rate hit a 40 year high of 8.1%. The Bank of Canada’s response has been to raise its key lending rate ten times to today’s 5.0%. This is expected to slow Canada’s economic growth rate, and Canada is already experiencing lower productivity. As a result of this, Scotia has cut its Canadian economic growth forecast for 2023 to 1.2% and sees even lower growth of 0.7% next year.

The US Federal Reserve Board held interest rates unchanged at 5.25-5.50% at the September 20th Federal Open Market Committee (FOMC) meeting and gave the impression that interest rates will remain high for a longer period. They noted that labour demand still exceeds labour supply so pundits are saying that interest rates will not be lowered soon. The US “economic activity has been expanding at a solid pace” (FOMC).

Higher mortgage interest rates lower buying power. Canada Mortgage and Housing Corporation reports that three-quarters of household debt comes from mortgages in Canada. Mortgage interest costs remain the single biggest driver of inflation. Mortgage rates have risen (+30.6% year over year) to a 22-year high of 6.7% for a 3-year fixed rate mortgage (TD). This in turn has stalled the real estate market. Residential rental companies are raising their apartment rents (up 6.5% in August) to cover their increasing business costs. This leaves less money to spend elsewhere. Consumer debt (non-mortgage debt) in Canada has reached a new record high according to Equifax. This squeezes the consumer as well.

Savers benefit from higher rates. On the other hand, higher rates are benefitting savers. In the United States, the income being generated from money market funds is greater than at any point over the last 30 years (Strategas 2023 09 20). This will not last indefinitely, but if you are a saver, rising rates is a positive. PMC is taking advantage of these rates while looking for value stocks.

Unemployment numbers keep Central Bank interest rates high. Central banks continue to monitor unemployment numbers in their quest for a “soft economic landing.”  The Central Banks do not want to be the cause of a deep recession. In Canada, the unemployment rate is 5.5%, which shows a “softening” in the labour market. In the US, unemployment is 3.8%, lower than the long-term average of 5.7%. The Federal Reserve Board is monitoring gas prices, housing prices, employment, and international events.

Unions are striking. September 15, the Unionized Auto Workers (UAW) went on strike for higher wages and job security with the Big Three car makers in Detroit. The car business accounts for 3 percent of the US GDP (total output of goods and services). The Detroit automakers represent about half of the total US car market (PBS 2023 09 10). The Hollywood Writers strike cost the State of California $3 billion. The Canadian Dock workers struck Vancouver ports over the summer. Ford Canada worked a deal with their union workers.

Natural disasters continue to disrupt lives and livelihoods.

The world political situation continues to be unsettled. Russia, China, BRICs, and the war in Ukraine all have mismatched agendas. The US Government avoided a shutdown on October 1. Starting October 1, US students will start making student loan payments after a two-year hiatus.

Good news

The Holidays are coming. Deloitte expects holiday sales to be up 4%.

The financial markets are able to float new issues. ARM, the British chipmaker, raised USD$560MM in its Initial Public Offering, and Instacart (CART), the grocery delivery company, raised USD$423MM later the same week! There is money looking for investments.

The United States Congress passed the Inflation Reduction Act last year. Over the next ten years, the Act will INVEST $783 billion in provisions relating to energy security and climate change. That is a lot of money going into the US economy! (Wikipedia).

PMC’s take

The outlook is still “murky.”  The “lower risk” fixed income returns of 5% means we must diligently look for equity opportunities with attractive yields and solid growth prospects. Good practice in portfolio management is being diversified by asset class, by currency, dollar cost averaging, and staying invested. We continue to use these good practices to manage your money.

Reminder:  deposit $6,500 into your TSFA for 2023.

PMC in the NEWS

Anish Chopra was interviewed by BNN (Bloomberg News Network) in September 2023. Here are the links:

Commentary reflects the opinions of Portfolio Management Corporation (PMC) at the time of writing and may reference sources that PMC believes to be accurate and reliable.  PMC does not guarantee the accuracy or completeness of such information and our opinions and viewpoints may change over time.  Forward-looking statements are based on historical events and trends and may differ from actual results.