2023 In Review: Navigating Market Jitters, Interest Rate Surges, and Promising Investment Opportunities

From a financial perspective, 2023 was a year where many had more questions than answers with regards to what to expect as the year unfolded.

In 2022, the S&P bounced back from its worst year in over a decade, and is on track to finish 2023 up as well with a gain of about 21% through November 30th. Having said this, the ride for investors hasn’t been a smooth one with most of the market gain’s hitting early 2023 leaving the balance of the year pretty bumpy.

We suffered through increasingly high interest rates that resulted from the developed world looking to quell inflation. Kicking off the year at 6% inflation the biggest question on everyone’s mind was how high and how long will the rising interest rate environment last. At years end, we are sitting at just below 3% inflation. The bank of Canada has begun to signal that interest- rate increases are probably done and in fact, potentially see interest rate cut towards the middle of 2024. This has propelled the forward-looking stock and bond markets in November which simultaneously suffered heavy losses in 2022.

As the saying goes, markets hate uncertainty. Market jitters are best captured or described by nervousness, fear, or anxiety among investors. When investors get the jitters, their actions push down prices.

Markets began to recover from the low of October 2022, albeit slow when comparing to historical recoveries this can be attributed to the uncertainty of how high rates would have to go to combat inflation. We are now seeing that we are nearing or at peak based on the latest monthly inflation numbers for Canada.

Although high interest rates hurt the average Canadian who has to worry about rising mortgage costs, increased carrying charges on loans, lines of credit, vehicle and recreational crafts etc., there is also an upside to interest rates moving forward that gets me excited as an investment advisor, higher returns on low risk, safety products.

While the overnight lending rate in Canada has gone from .25% (at its lowest point in November of 2021) to 5.25% (December 2023), and variable mortgage rates soaring from .9% (November 2021) to now 6.25% (December 2023) we also have access to savings accounts offering rates higher than we have seen in the last decade. Banks and lending institutions are offering 5% or more on pure savings accounts while 1-year GICs are paying up to 5.5% and 5.3% (December 8th,2023) for terms longer than one year.

Dividends generated from large blue-chip stocks have also seen an increase as well thanks to a rising interest rate environment. Highly rated bonds will now also become attractive to investors who want to avoid the volatility in the stock market and are looking for more stable healthy returns. After a very long stretch of enduring low returns due to historically low interest rates fixed income (bonds) should return to earning decent passive income while mitigating risk by preserving the capital invested.

As an investment advisor, we feel like we have tools back in our tool kit to be able to bring solutions to our clients that have not really been attractive strategies for over a decade due to a bargain basement interest rate environment.

Although a higher interest rate environment does hurt some stocks due to the debt levels they carry, many companies flourish in this domain and once the rate conditions level out, there are many attractive choices to make when looking at safer less volatile investments.

In talking with several bond fund managers over the past couple of months, the sentiment is mainly excitement because they are now able to buy A rated bonds that now have attractive rates attached to them. One bond manager explained as an example that an overall diversified fund of 80 bonds has a yield of let’s say 7% (the avg of all the bonds interest rates in the fund) as of November and if interest rates do not increase in the next 12 months, then the rate of return for investors would be 7%. If interest rates go up over the next 12 months by .5%, then that rate of return will become 3%. However, if interest rates fall by .5% in the next 12 months, which is a much more realistic situation, then the rate of return will become 11%. This is due to the inverse relationship between interest rates and bond prices.

For example, if you purchased a $1,000 bond at 3% interest, which had 18 coupon payments remaining of $15 each, this is how an increasing interest rate environment would impact the market value of your bond.

Here’s how a decreasing interest rate would impact the same bond.

If history can be a guide for us with regards to long term investment fundamentals, then the next 3-5 years should be an exciting time for portfolios and that includes both bonds and stocks.