Every summer we put together a small collection of charts that we find thought provoking.  The intent is to provide some light reading for the dock.  As always, your comments and any charts you’d like to share, are more than welcome.

 

GICs and Real Returns

 

I’ve never had so many conversations with investors about GICs (Guaranteed Investment Certificates) as I have had over the last eighteen-months. For the first time since 2008, GICs (Guaranteed Investment Certificates) have positive real returns, meaning that the interest paid by a GIC is higher than the rate of inflation. While parking money in GICs was an attractive strategy in 1990s, the chart below shows that since 2000 GICs have only had positive real returns in four years (2000, 2001, 2007, and 2008).  The challenge with using GICs remains reinvestment risk, since GICs may not have positive real returns when an investor's current GIC matures and it’s time to reinvest.

 

Markets are Volatile

 

While market volatility can be unsettling, we need to remind ourselves that each year the S&P500 typically experiences more than seven 3% pullbacks, more than three 5% pullbacks and more than one 10% pullback.  After a robust rally to start 2023, the market is down 5.2% from the late July peak.  The chart below highlights that this is normal price action for the index. 

 

 

Housing

 

In spite US 30-year mortgage rates being above 7%, their highest level in fifteen years, US Household formation remains above trend and stronger than expected; Millennials appear to be moving out of their parent’s houses, and levering-up to buy homes in spite high mortgage interest rates.

 

YoY US Household Formation vs 10-Year Trend

 

 

Commercial Real Estate

 

While no one wants to own Office real estate, the indiscriminate selling in Commercial Real Estate may be creating opportunities outside the Office subsector.

 

Inflation

 

It’s unlikely we’ll see a significant surge in inflation while the money supply is shrinking at the fastest rate ever recorded.

Source: YCharts

 

But we will likely see US inflation move lower in the months where the relatively large year-over-year increases roll out of rolling twleve-month calculation; the chart below shows that large year-over-year increases were seen last September, October, January, February and April.

 

Investor Sentiment

 

Cash levels have retreated from recent peaks but remain elevated.

 

It is still difficult to find an equity bull.

 

And market rallies can extend through the end of the year.

 

Enjoy the Lake

 

Every market is different and volatile markets are unsettling. The challenge for investors is to remain focused on their long-term objectives and to avoid panic selling. If investors can remain focused on their long-term objectives, they can reduce the need for market timing and ‘hero calls’. By saving and investing at a consistent rhythm across market cycles, an investor will end up buying more securities when the market is inexpensive and fewer securities when the market is expensive.

 

Enjoy your August and let me know if you’d like to have a more involved discussion.

 

Delli 416-594-8990

delli@cibc.com

 

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