Monthly Debrief January 2023
Our Monthly Debrief video is a summary of all the information that we would like to share with you in an effort to provide an update.
Hi, and welcome to January, 2023’s monthly debrief. My name is Leanne Macher and this is all the information that I've read or listened to from analysts or economists throughout the month of December that I felt that I should share with you. Now, before we just jump in, I just wanted to say an absolutely big happy New Year. I know that 2022 proved to be an very interesting year for many different factors and equity markets ended up in the negative unfortunately. But you know what? We can always turn the page and look ahead and see what those portfolios will do in the new year. All right, let's jump in. So in the economics side, there are some real risks and the real risks continue and 2023 very much might be the year that we have the recession. The size of the recession is very questionable and it's probably probability wise around 70 to 80% at this point.
And so it's kind of been bobbing around, but it's looking further and further likely as far as likelihood. We are seeing a lot of end of cycle indicators and we are feeling as though that this time around potentially that the recession will be a little bit more perhaps useful this time in terms of getting that labor market under control. It's really being hot, hot, hot, hot, and we're unlikely to see massive layoffs this time. And the reason being is because companies are fearful, they did a lot of work to attract talent and so they don't necessarily want to quickly give it up because there might be a talent shortage coming up here also we're going to see potentially through the recession in inflation correction, which would be very much welcomed and also the right sizing of housing. What recession will do is very much set us up for a next couple of years of, or a next few years of really quite nice growth.
And so then we are going to have to go through the little bit of pain in the economics, but the question of the size of the recession is definitely out there and we're anticipating probably a mile to Midling or a middle size recession. So it's not necessarily going to be like the past couple of recessions that we've seen. Alright, let's take a look at C I B C, world markets economic outlook. And so you can see real G D P and that represents the growth of our economy. And so you can see that 2023 forecast is still actually in fact a positive. And so we're looking at a positive, but that doesn't necessarily mean that we're not going to see some negative first and then the turnaround or the uptick or what have you. And so then that's what our forecast is. And so, but it might be a little bit bumpy along the way I suppose.
Now I want to draw your attention also to the consumer price index. This is the indicator of inflation. And so it's a basket of goods that they track and what have you. And so then you can see here that the current inflation is in and around 6.8 from its highs back in June of around, I would say about 8%. And then now you can see what they're anticipating or what we're forecasting for 2023. And so that is quite the drop from 6.8 to 2.9% and then in 2024, we're anticipating it's going to go further and potentially get back down to that 2% because the Bank of Canada has increased rates so quickly and so rapidly it is going to impact our inflation and we could see a steady decline, which is what the Bank of Canada is hoping for. All right, so let's turn our attention to our equities.
So the month of December, you can see right at the tail end here. So it had a really nice, quite nice runup and the red is the TSX and the blue is the s and p 500. The s and p 500 is the US and the TSX is Canada. So you can see the red here up and then it came a little down off this off the end of December here. Okay, so what does that look like on a month data series? And so you can see the significant dip back in 2020 and then the huge runup and then quite a bit of volatility. It's bouncing and bouncing here. And so you can see that it's recovered a little bit since October, but it's definitely going to be continued volatility over this period of time. Alright, so equities 2022 meaningful declines and now there is a return potential that has increased because in the beginning of 2022 we saw that equities and their valuations were quite high.
Having said that, there was a lot of surprises like say for instance the Russian Ukrainian war and things like that. They kind of derailed things from there. Having said that, now if you look at the starting point being now, we are anticipating that there is potential to have a fairly decent single digit return over the next little bit here. Earnings in companies earnings have not yet come off and they've not, not fully impact or they're not fully reflecting the impact of the economic slowdown or the rate increases because both of those things will impact businesses. And so then the, when the earnings adjust, we are anticipating that it might drive stocks further negative for a while before the recovery hits. And so that's why there might be the recession and like stocks are leading indicators though, so you can't judge when the recession timing is as to when you're going to see that uptick.
So it's a very tricky, you just wanna stay invested as a long-term investor, it's very, very hard to judge where the bottom is and where the long or the bottom of the equity cycle will have been except for looking in hindsight. So if you're looking backwards as everything's very clear, but of course we don't have really the ability to look backwards and it could have been in October, it could be sometime in the future. Time will tell and hindsight will drive that. Okay, so onto interest rates in December, the Bank of Canada raised the interest rate by 0.5 to 4.25% and this is signaling that we're getting close to the end of our rate increases. So future increases, what they indicated was maybe going to be more guided by some of the incoming economic data and less so driven by inflation because inflation is going to react at a lag to the increases in rates that they've done.
So the increases and monetary taking off the stimulus has been meaning to get inflation under control. Now, the ability to cut interest rates from here, because when we were really close to 0% interest rates, the Bank of Canada really didn't have their monetary tools because they were right at the brink of zero. But now if you look at it, they have a lot of room. If they needed to drop the interest rates to stimulate the economy, if we were to head into the recession and inflation was under control, then they have a lot of power now comparatively. So the full impacts of the cuts the full impact of the cut has as like when they start to cut, it has a significant or a considerable leg as does their increases. And so then we haven't seen it fully impact yet. And so it's, it's front leading or front.
I I guess they front, front put it in the front I suppose as to what we are anticipating for some of the pain that the rate increases are going to cause down the road. And that will be the same with the cuts. And so we will see cuts and then we'll see the right sizing of the economy as well. Oh, right. So taking a look at interest rate forecasting, you can see it's fairly stable, so it doesn't really look like there's a lot coming off now. And so you can see the three month t-bills right at the top here and then the 10 years down here. Now, one thing I wanted to point out is that you are getting paid more in a three month period and also over a two year period right now than over a 10 year period. And what that means is your yield curve or the the, the curve that they look at between the rates and the maturities is very much inverted and that is a recession signal, a very strong one.
Alright, so turning into fixed income and credit markets. So in December, as I was saying, the Canada yield curve, the inversion was the highest since 1990s. The two year versus the 10 year rate is now in a spread of about 1%. So if you invest for a 10 year period, so you're locking in your money for 10 years, you're actually getting 1% less in yield than if you're locking in for two year period. Now that is because the market is anticipating that the rates from here are going to be dropping. And so as the rates drop, this represents a really good buying opportunity for our bonds. And so they are low risk assets and you can get them at bottom bargain prices right now. And, and they're, they're very attractive. They're paying quite a bit right now. And so then they are yielding higher than we've seen in decades.
And so at times we're looking right now at somewhat lengthening some of our maturities durations because there is an anticipation that as the rates decrease, then you're gonna see your bond pricing increase and you could have some capital gains from here. So it's not a bad asset class to continue to be in and don't shy away of because of what has happened in the past. All right, so inflation came off. I talked a little bit about this at the beginning in the economic section, but it came off of the June, 2022 peak of 8.1% and Bank of Canada expects it to fall to 3% and then down to around 2% by 2024. What this means to me is that as we're doing retirement planning, we don't necessarily need to use the current inflation because Bank of Canada was very, very specific about getting inflation under control.
So when you're doing your projections and seeing what your retirement is going to look like, I I don't know that I would use anything beyond a 3% inflation rate. Now that is anticipating for the next 20 or 30 years, but you don't want to be using 8% because then you'll be saving way more than you need to and you might end up working longer than you need to too. And so just keep in mind that we are pegging the inflation to go back down. So in the charts we're seeing also the money supply. So during covid they pumped in a whole bunch of money, but we've seen that very much come off the table now and this is a leading indicator and so it's a leading indicator and inflation should follow suit. Okay, onto some tax considerations Real quick here. So the inflation for tax calculations increased by 6.3%, which is quite a high number.
And so we saw our tax-free savings limit increased to 6,500, and now the lifetime is 88,000 that you can contribute if you're over the age of 18. Now the 88,000 accumulates after you're 18. So it it's not necessarily that you have that full limit if you are just turning 18 or just turning 19, you have to pay attention to the overall limit as far as each year after your 18th birthday. Now also, the increase of the 6.3 impacted our capital gains exemption and our old age security repayment threshold. Now, the repayment threshold for 2023 is now just about 87,000. So that means that as an individual, if you're making more than 87,000 in and around, you're gonna start seeing your old age and you're collecting old age security, I should say. You're gonna start seeing your old age security getting clawed back. Now my source here is I, I have attached an article by our very own Jamie Gollum back and I encourage you to read it if you are interested in some other tax changes that are in the article.
I didn't list them all. And just a reminder, just a quick reminder on some deadlines, prescribed rate. Remember that if you have a prescribed rate loan into a family trust or a spousal loan or some, some other loan structure that uses the prescribed rate, the deadline for interest payments for 2022 is 30 days after the beginning of the year. So that is January 30th. Now, just as a reminder, we did see the prescribed rate increased to 4% on January 1st, 2023, but rest assured that you're still grandfathered if you have an existing loan. So you're still at the prescribed weight when you wrote the loan. Now also our R S P contributions for 2022, the deadline this year is March 1st, 2023, maximums for 2022 and 2023 are 29 and 30 and change for both of those years. All right, so that's all I have for tax considerations, for economic update and what have you this month. So I hope you found some useful little tidbits and I would welcome any questions. Give me a call anytime. All right, until next month. Oh, here's the disclaimer.