Macro Update: Are we there yet?
This summer, Vancouverites have flocked to the dirt trails of local mountains. Now imagine, exhausted a climb, you look up and expect the next sign to show that you are 200m to your destination, only to find that you still have a kilometre left. This is how we feel about the bank pushing their target expectations to 2025, but we know that if we keep moving, we will get there.
Both Canada and the United States remain in the late phase of the business cycle, with forecasts of a recession by Russell Investments pushed to 2024¹. According to the chart from Fidelity Investments, there has been a decline in small businesses’ plans to hire, which suggests an expectation of slowing economic activities². This reduction in job opportunities, relative to the number of available workers, can help control wage inflation and overall inflation.
Speaking of inflation, the Bank of Canada reported that the inflation rate for June 2023 stood at 2.8%, falling within its target range of 1-3%, but picked up to 3.3% in July³. Despite the uptick, this figure indicates a positive development compared to the 5.9% in January and 8.1% in June 2022. However, this progress has come with adjustments, and the Bank of Canada has raised interest rates twice in the past quarter, bringing the current interest rate to 5%. Still, they expect it will take until 2025 to reach their 2% target⁴.
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Asset Update: Different paths, same destination
Now, you reach a fork in the trail, with two paths that lead to the same vista:
- Varying terrain that climbs steeply up some parts, then back down on others
- A gravel path that averages out the incline over the distance for a smooth climb
For some, the varying terrain may be fun, especially if they do not mind the extra sweat. For others, the gravel path is preferred.
As of August 1st, 2023, the S&P 500 has shown a notable return of 19.2% for the year. However, it’s important to understand that most of this growth can be attributed to a select few major technology companies and the public’s excitement about artificial intelligence. When we look closer at the data presented by Russell Investments, excluding these top-performing companies, the actual return of the index as of June 15th was only 3.8%¹. This lower figure indicates a potentially challenging economic environment in the US that could lead to a recession.
In our recent updates, we’ve highlighted fixed income as an appealing choice for investors seeking moderate returns with lower risk, and this trend continues. Vanguard, as of July 19th, has provided a 10-year outlook with expected annualized returns for various equity and fixed income categories and can be found here⁶. Interestingly, they predict that certain bond categories could offer comparable returns to US equities but with significantly lower risk, as indicated by their projected volatility. It’s essential to keep in mind that these predictions are based on current market conditions and may evolve over time.
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Summary: Choose your own adventure
With hiking, if you simply keep going, you will eventually reach your destination. Your choices, such as the level of difficulty or the amount of preparation, are part of what affect your journey. Saving and investing is also dependent on the risk level you choose and how knowledgeable you are about your situation, so you can choose the best path for you to reach your goals. Of course, both are also impacted by uncontrollable factors, such as weather in hiking and pandemics affecting the economy. Being prepared and understanding the impacts of our decisions puts us in a better position, no matter what the situation.
Reach out to your advisor if you have any questions about your financial plan and how your investments are positioned to handle your journey.
(Photo by Reuben Obery on Unsplash)