Lexicon Financial Group Weekly Update — September 25, 2024
“Politicians attend dinners at hotels with contractors. Bankers discuss interest rates at lunch.”
From the desk of Craig Swistun, CIM, MFA-P, Portfolio Manager, Raymond James Investment Counsel, and Wayne Hendry, Client Relationship Manager, Raymond James Investment Counsel
Looking Around
Interest rates have been cut by central banks across the globe and more cuts are expected going forward. But what does this mean? Borrowing is becoming cheaper, which is good for businesses looking to make longer term investments. It is also good for businesses (and consumers) who have significant debt. Consequently, a decrease in interest rates is viewed by investors and economists as catalysts for growth. More investment in business and innovation. Less money (as a percentage) of a budget being directed towards debt payments. And increased savings, which fuels the value of equity markets.
Consumers often spend more. They are more comfortable borrowing to buy a home, a car, or go on a bucket list vacation. Whether borrowing to do this is a sound financial decision – well, that’s where financial planning comes in. That being said, businesses also benefit as they will be able to finance operations, acquisitions, and expansions at a cheaper rate.
Particular winners of lower interest rates are usually dividend-paying sectors, such as utilities and real estate. In addition, large companies with stable cash flows and strong balance sheets also benefit from cheaper debt financing. A change in the interest rate generally impacts equity markets immediately, while for the rest of the economy, it may take about a year to see any widespread impact. (1)
The Bank of Canada (BoC) will make two more rate announcements (on October 23 and December 11) and expectations are that there will be two more quarter-point cuts at those meetings, bringing Canada’s target rate to 3.75 per cent at year-end. The U.S. Federal Reserve (Fed) will also have two meetings this fall, and more cuts are expected from these meetings. As with everything, there are winners and losers in this scenario. The winners are:
Investors who own bonds are set to benefit, as bond prices generally rise when interest rates drop. The FTSE Canada Universe Bond Index is up 1.82 per cent this month and 4.18 per cent year-to-date. The Long-Term Bond Index is up 2.63 per cent for September after being in the red for most of the first eight months of the year because of the inverted yield curve.
Interest-sensitive sectors such as financials, utilities, real estate, and communications are expected to make a comeback after being beat down in 2022 and 2023. For example, financials are up 17.5 per cent this year with most of the gain (15.06 per cent) coming in the third quarter.
And the losers are:
As interest rates come down, high-interest-bearing savings accounts vanish like fog in spring. According to ratehub.ca, EQ Bank offers an online account that pays 4.25 per cent but you must give 30 days’ notice before making a withdrawal. This is basically a one-month GIC.
Longer term investors looking to renew their GICs at high rates may be shocked, as what was available last winter is gone. We have the ability to source GICs on behalf of clients from a wide range of lenders, but for comparison, the big banks are looking to pay 3.5 per cent or less on five-year terms. And, although inflation is somewhat under control at just over two per cent, gains on GICs are treated as interest income, which means it is taxable as regular income in taxable accounts. That doesn’t exactly spell growth. (2)
All of this said, things are starting to look up for equity markets and the economy, but no one has a crystal ball (as far as we know) to accurately forecast the future. Markets are not predictable. The best we can do is learn from the past, analyse the present, and make the best decisions we can to position them properly for the future.
Read and Watch
Want deeper insight into topics in your Weekly Update? Then, read and/or right click:
After dark days for stocks, see where stock market and economy stand
China likely needs more than rate cuts to boost economic growth
European markets open higher as China unveils economic stimulus package
Looking Back
The S&P/TSX composite (TSX) index, finished last Friday slightly above its record high the previous day, helped by gains for the shares of gold miners and uranium producers, but the move was limited as investors took stock of recent advances for the market.
For the week, the index was up 1.3 per cent, its sixth weekly gain in the last seven weeks, after the Federal Reserve cut interest rates for the first time in four years, boosting investor sentiment globally. (3)
Markets in the U.S. moved to new highs last week, as investors basked in the afterglow of the momentous Fed interest rate cut on Wednesday. This rally was also relatively broad, with the smaller-cap indexes outperforming as well.
In Europe, equity markets ended last week mixed as the rally triggered by the Fed’s interest rate cut faded and investors grew cautious about the outlook for monetary policy. This happened despite being buoyed by China’s easing measures.
Japan’s stock markets rose over last week, with the Nikkei 225 Index gaining 3.1 per cent and the broader TOPIX Index up 2.8 per cent.
Chinese equities rose in a holiday-shortened week as the Fed’s decision to cut interest rates offset a series of disappointing economic data including growing unemployment, a continuing slump in the real estate sector and a slowing economy. These are growing risks for China meeting its economic growth target of about five per cent this year. Consequently, many economists and analysts expect that China’s government will implement more easing measures to stimulate the economy. (4)
The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable, but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors, and we recommend that clients seek independent advice from a professional advisor on tax-related matters.
How Do Interest Rates Affect the Stock Market? Mary Hall, Investopedia, September 19, 2024
It may be time to adjust your portfolio - a fundamental change in the investing climate has begun, Gordon Pape, The Globe and Mail, September 23, 2024
The close: TSX extends record-setting run as gold miners climb, The Globe and Mail, September 20, 2024
Global Markets Weekly Update, T. Rowe Price, September 20, 2024
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