Advertisement
Canada markets open in 3 hours 57 minutes
  • S&P/TSX

    21,837.18
    -12.02 (-0.06%)
     
  • S&P 500

    5,149.42
    +32.33 (+0.63%)
     
  • DOW

    38,790.43
    +75.63 (+0.20%)
     
  • CAD/USD

    0.7367
    -0.0022 (-0.30%)
     
  • CRUDE OIL

    82.48
    -0.24 (-0.29%)
     
  • Bitcoin CAD

    86,383.00
    -6,092.95 (-6.59%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • GOLD FUTURES

    2,155.70
    -8.60 (-0.40%)
     
  • RUSSELL 2000

    2,024.74
    -14.58 (-0.72%)
     
  • 10-Yr Bond

    4.3400
    0.0000 (0.00%)
     
  • NASDAQ futures

    18,213.25
    -18.25 (-0.10%)
     
  • VOLATILITY

    14.51
    +0.18 (+1.26%)
     
  • FTSE

    7,714.27
    -8.28 (-0.11%)
     
  • NIKKEI 225

    40,003.60
    +263.20 (+0.66%)
     
  • CAD/EUR

    0.6788
    -0.0004 (-0.06%)
     

Autumn market volatility means it’s time to take stock of investments

image

[NEW YORK, NY - SEPTEMBER 13: Traders and financial professionals work on the floor of the New York Stock Exchange (NYSE) ahead of the closing bell, September 13, 2016 in New York City. The Dow Jones industrial average fell 258 points on Tuesday. (Photo by Drew Angerer/Getty Images)]

It’s like that unexpectedly chilly day in mid-September when you really know summer’s over.

For investors, what had been a good summer on the stock markets came crashing to a halt on Sept. 9 when stocks dove after comments from the U.S. Federal Reserve raised worries that U.S. interest rates might rise sooner than previously expected. The following Monday, Asian markets did the same.

ADVERTISEMENT

Of course, with the U.S. election just weeks away, markets are as prone to overreaction as ever. But the coming U.S. rate hikes are just part of what some say is a turning point for several central banks, as Japan may be trying to push its long-term rates higher and there is uncertainty about how long the European Central Bank will keep pumping money into that economy through bond purchases.

In short, it’s looking like the days of insanely low interest rates may be coming to an end. And any kind of change like that tends to hit the market hard.

“Maybe a bit of an overreaction,” says Gavin Graham, chief strategy officer at INTEGRIS Pension Management Corp, of the recent market drop, which saw the U.S. S&P 500 plunge 2.3 per cent and the S&P/TSX composite index fall 18 per cent.

“But if the next (rate) move is up, which seems to be a reasonable forecast at the moment… you can understand why, because a lot of the things that have been riding it were the ones that were beneficiaries of this period of low interest rates.”

What this means for you

So what does this mean for the average Canadian?

On one level, not much, because the Bank of Canada is nowhere near ready to start raising interest rates. So that variable rate mortgage is still safe for a while.

But no economies exist in a bubble, and the Fed catching a cold does make us sneeze. Canadian stock and bond markets, for instance, often follow the lead of U.S. markets, rather than reacting to Canada-specific news.

So how does one prepare?

First off, it’s good to remember that higher rates have been in the offing ever since central banks cut rates to the bone in the wake of the 2008 financial crisis. Market pros will tell you that it’s frankly unnatural to go this long with such cheap money floating around, so seeing interest rates about to rise a bit is actually healthy.

But as with many healthy things, there will be some pain involved as things start to go back to normal.

For stock investors, the general truth is that rising rates are bad for stocks. This is because higher rates mean a higher cost of borrowing, which means companies have to pay more to finance expansion, while people have less money lying around to buy new houses, and iPads, and extra RRSPs.

But in the big picture, rising rates usually mean that growth has reached the point where inflation is being generated, so that’s good.

Re-evaluating your portfolio

If you feel the need to rebalance to prepare for the shifting rates, anyway, start by lightening your weighting in investments that may have had their best days in a low-rate environment, says Graham.

First of all, he says, don’t sell those bank stocks, as financial services are one of the few stock sectors that benefit from rising rates. As rates rise, banks can lend money at increasing margins, which is good for the bottom line. Rather, look to get out of equity investments that have specifically benefited from low rates.

“A lot of things that people have been buying instead of bonds like REITs (real estate investment trusts) and utilities and looking fairly expensive because rates have been very low,” he says.

“If you’ve already got some exposure there, maybe you want to take something off the top.”

Instead, reallocate into sectors that are more sensitive to economic activity, but have been undervalued. Graham recommends oil, which has been depressed by weak commodity prices.

That should give you some options on the Canadian front. But you may want to consider increasing your holdings of U.S. stocks, too.

That may seem counter-intuitive since it’s the U.S. central bank that’s itching to start pulling money off the table, but doing so will allow you to benefit from the potential gains of the U.S. dollar versus the loonie, as rising interest rates usually benefit the currency of the country where rates are rising.

“Be in U.S. dollars because the loonie’s strengthened quite a lot with the energy and commodities earlier this year, and is starting to come off,” says Graham.

“Companies that generate income in the states or that pay U.S. dollar dividends could be worthwhile to look at.”

In terms of bonds, rising rates is a kind of good news/bad news story. The good news is that rising central bank rates will push up bond yields, which have been anemic for years. The bad news is that the bonds you currently hold will fall in price, because they’ll be less appealing compared to newer, higher-yield debt.

So Graham recommends buying short-term bonds that will mature quickly, allowing you to then reinvest and benefit from the gradual rate increases.

Of course, all of this concern may represent just the latest in a number of false starts on the rate hike front.

And if economic growth isn’t the reason rates are going up, then markets could continue to be in trouble, says Barry Schwartz, chief investment officer at Baskin Wealth Management.

Just to make it interesting, you might want to consider a plan in case the rate hikes don’t come to pass.

“If you think they’re not going to raise rates you’d probably make more money betting against those U.S. financials, because I think that right now they are priced in for a rate hike,” says Schwartz.