After a bull market like the one we experienced prior to 2022, it can be tempting to stick to the same investment strategies that have been working. But the underlying economic factors are set to be materially different in the coming years, which means the market is likely to look very different from what we’ve seen in the past 10-plus years.
Yahoo Finance’s Jared Blikre explains why the bond market is still important for investors.
AKIKO FUJITA: Welcome back to “New Year, New You,” brought to you by Synchrony Bank Savings. Well, let’s take a look at bond market performance today, tomorrow, and even far into the past. We’ve got Yahoo Finance’s Jared Blikre at the Y-Fi Interactive to walk us through this one. Jared.
JARED BLIKRE: That’s right. And let’s start out with the bond market, as we’ve been talking about. This is the 13-week T-bill, so technically not a bond. This is a short end of the curve. This tracks what the Federal Reserve has been doing. And over the last year, we’ve had a surge of activity. Went from near zero, accelerated in the summer, and then started plateauing later in the year. But still going up, and very important to understand that. That has put considerable pressure on risk markets.
Now, here is the S&P 500. One year ago, the market was making record highs, first time we ever made a record high on the first trading date of the year. And you can see we’re still well within a bear market, trading at the lower end of the range here, down 20% over this time period. Now, was it a bad year for bonds? Yes, it was. In fact, it was a worse year for bonds going back about 100 years. You’d have to go back to World War I. After World War I as that was wrapping up, we had a worse year.
And also interesting is that we were coming out of a pandemic, the worst pandemics since the last very recent one that we had. Also interesting to look at this chart because B of A has done a great job of going back all the way to the 1700s. South Sea bubble– if you guys haven’t heard of that, you should look it up. The Civil War is in here, post-World War I, UK going off the gold standard, Marshall Plan. That’s World War II. Suffice to say, these are game-changing moments for the market.
Now, let me show you my next slide here. This is negative yielding debt. Why is this here, maybe out of place? No, because I am seeing this as the final chapter on easy money. Negative yielding debt was an experiment that grew in the era of easy, cheap money. And look at that decline here from the pandemic stimulus to right now. That is round-trip to zero. I’m not saying it can’t go up again, but I think this is probably in the history books as a failed experiment.
Now, looking ahead, January actually has very positive seasonality, especially in the third year of the presidential cycle, which is where we are right now. You can see this the Dow’s second-best month out of the year. S&P 500 and NASDAQ– that is their best month of the year, number one place here. And stocks go up. Dow usually goes up 4% in January, S&P 500 about the same amount, and the NASDAQ almost up 17%.
And a really good track record over the years since 1950. 16 up, 2 down, 11 up, 2 down only because of the time period that we’re looking at here. So we could see some activity pick up in January. And there’s an old saying– as January goes, so does the year. That’s in play too. So January a very important bellwether for the entire year.
I want to close on this. This is a look back on the total days when the S&P 500 index moved 2% or more. And this goes back all the way to the 1960s, basically the beginning, almost so. And you can see we are in an era of elevated volatility. 2020-2022 really impacted the markets because of that high volatility, and there’s no reason to think that it’s just going to disappear out of the blue this year. But we’ll have to see.
Predictions for the housing market, lower internet costs and stable stocks: Must-read business and investing stories – The Globe and Mail
Getting caught up on a week that got away? Here’s your weekly digest of The Globe and Mail’s most essential business and investing stories, with insights and analysis from the pros, stock tips, portfolio strategies and more.
High interest rates will continue putting pressure on Canada’s housing market
The Bank of Canada this week increased interest rates for the eighth consecutive time but said that it expects to hold off on further hikes to “assess whether monetary policy is sufficiently restrictive to bring inflation back to the 2-per-cent target.” As Mark Rendell reports, the central bank raised its benchmark rate by a quarter of a percentage point, bringing the policy rate to 4.5 per cent, the highest level since 2007. With borrowing costs and mortgage rates at their highest level in years, many potential homebuyers have been shut out of the real estate market, writes Rachelle Younglai. The typical home price across the country is already down 13 per cent from its peak last February amid the bank’s attempts to rein in runaway inflation by reducing access to cheap loans. As such, the bank is predicting home prices will decline further before sales pick up later in the year.
These stocks offer portfolio stability amid rising prices
Rising interest rates were the main contributor to the woes of the stock markets in 2022. Interest-sensitive securities such as REITs, utilities, telecoms and bonds all tumbled as rates steadily increased. Combined with the collapse of tech stocks as the economy that benefited from pandemic lockdowns dissipated, we ended up with all the major stock markets in the red, and the Canadian bond market experiencing its worst loss in four decades. But there were some inflation-beaters. Gordon Pape looks at a number of inflation-beating securities that thrived in a rising price environment and are still doing well, although momentum is slowing.
The clearest sign that inflation is declining
When assessing inflation, central bankers and economists will often exclude food and energy costs, but in a recent report, Karyne Charbonneau, executive director of economics at CIBC Capital Markets, said the Bank of Canada should consider the rapid climb in mortgage interest costs “when judging the underlying inflationary trend.” As Matt Lundy writes, while the bank is raising interest rates to cool demand and tamp down inflation, its efforts are having the opposite effect on mortgage payments, which have jumped 18 per cent in the past year. Although mortgages carry only 3-per-cent weight in how the Consumer Price Index is calculated, the increase is substantial enough that mortgages are now the largest contributor to annual inflation.
Could lower cellphone and internet costs be coming?
Lowering cellphone and internet bills is a top priority for Vicky Eatrides, the new chair of Canada’s broadcast and telecommunications regulator, Irene Galea reports. Unfortunately, Ms. Eatrides is inheriting a commission that is widely seen as slow to make decisions. The continuing legal proceedings of Rogers Communications Inc.’s takeover of Shaw Communications Inc. are attracting unprecedented attention to the inner workings of the telecom industry and the future of cellular service competition in Canada. Meanwhile, two CTRC policies, concerning industry rates for broadband and wireless networks, finalized during the previous chair’s term, are still being debated among industry players. Ms. Eatrides would not reveal specifics related to her plan to lower cellphone and internet costs, but added she hopes to speed up the commission’s decision-making process.
The real savings of owning an electric vehicle
With gas prices yo-yoing this past year, are the savings associated with the lower operating costs of purchasing an electric vehicle ultimately worth it? David Berman, a Hyundai Ioniq 5 owner, compares charging costs for EVs to gas-powered vehicle costs over the same travelling distance. “I’ve driven almost 10,000 kilometres – did I mention that I don’t drive much?” he writes. “I’ve saved about $780 over the past year. Over 10 years, these savings would rise, theoretically, to a total of $7,800.” Additionally, he got a $5,000 federal EV rebate when purchasing the car in Ontario in early 2022, whittling down the nearly $50,000 list price for his vehicle to about $37,200 compared with a hypothetical gas-burning version of itself.
Record-low rental vacancy rate
There are fewer apartments available to rent in Canada than at any time since 2001, according to Canada Mortgage and Housing Corp’s annual rental report released this week. As Rachelle Younglai reports, the country’s apartment vacancy rate dropped to 1.9 per cent in 2022 – down from 3.1 the year before and the lowest level in more than two decades – owing to higher net migration, the return of postsecondary students to the campus and the spike in borrowing costs. The country’s largest rental markets were under particular stress, with Toronto’s apartment vacancy rate dropping to 1.7 per cent last year from 4.4 per cent in 2021, Montreal to 2.3 per cent from 3.7 per cent and Vancouver to 0.9 per cent from 1.2 per cent. The national average monthly rental price for a two-bedroom rose 5.6 per cent to $1,258 last year, with Vancouver and Toronto commanding the highest rents at an average of $2,002 and $1,765 monthly.
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3 reasons dividend stocks can lead the next bull market
Dividends may make up a larger portion of the total return
Over the past decade, dividends have contributed less than 25 per cent of the S&P 500’s total return, as years of low interest rates helped inflate asset valuations. Historically, though, dividends have made up a larger portion of the market’s total return. Dividends have accounted for an average of 40 per cent of the S&P 500’s total return since the 1930s, according to data from Fidelity Investments.
If inflation remains high, it will be very difficult for the market to grow via multiple expansion as it has during the past 10 years. This opens the door to dividends regressing to the long-term mean and making up a larger percentage of the total return than it has recently.
Valuations are attractive for dividend stocks
Dividend-paying stocks are currently undervalued relative to the broader market judging by the price-to-earnings (P/E) ratio. The P/E for dividend-paying stocks in the S&P 500 Dividend Aristocrats was lower than the P/E for the S&P 500 as of Dec. 30, 2022. This suggests dividend-paying stocks may offer better value for investors compared to non-dividend-paying stocks.
This is common during a bear market like the one we experienced last year. The good is thrown out with the bad, as companies with consistent earnings are sold off with the same urgency as less profitable companies. This creates an opportunity that can be identified by using the P/E ratio.
Great companies with robust business models and long histories of profitability rarely go on sale, so this can be a great opportunity to add quality names to a portfolio.
Better track record
Dividend-paying stocks have outperformed non-dividend-paying stocks over long periods of time. A study of the S&P/TSX composite index from 1986 to 2021 by RBC Global Asset Management found that stocks growing their dividend had an average annual return of 11.2 per cent compared to 6.5 per cent for the overall index and an abysmal 1.4 per cent for non-dividend-paying stocks.
This trend has even held up during economic recessions, as dividend-paying stocks have shown to be more stable and less volatile than non-dividend-paying stocks. For example, the same RBC study found that dividend-paying stocks in the composite index had a standard deviation (a measure of volatility) of 13.9 per cent, compared to 23.3 per cent for non-dividend paying stocks. This indicates dividend-paying stocks have been less volatile over the long term.
Remember that investing in the stock market carries risks and a professional investment adviser can help assess your investment goals and risk tolerance and develop a personalized investment strategy tailored to your specific needs and circumstances.
Taylor Burns is an investment adviser at Manulife Securities Inc. and Balanced Financial Wealth Management. The opinions expressed are those of the author and may not necessarily reflect those of Manulife Securities Inc.
Weaker Orders, Investment Underscore Ailing US Manufacturing
(Bloomberg) — US manufacturing showed more signs this week of succumbing to the Federal Reserve’s aggressive interest-rate hikes that are taking a bigger bite out of demand and risk upending the economic expansion.
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The government’s first estimate of gross domestic product for the fourth quarter and a report on December factory orders for durable goods pointed to sizable downshifts in both spending on business equipment and bookings for core capital goods.
The durable goods report Thursday showed orders for nondefense capital goods excluding aircraft — a proxy for business investment — dropped 0.2% in December after no change a month earlier. Over the fourth quarter, bookings for these core capital goods posted the weakest annualized gain since 2020. Shipments, an input for GDP, decreased for the third time in four months.
“Taken in tandem with the output data where industrial production has declined in six of the past eight months, it is increasingly evident that the manufacturing recession is well underway,” Wells Fargo & Co. economists Tim Quinlan and Shannon Seery said in a note to clients.
Also on Thursday, the GDP report showed outlays for business equipment dropped an annualized 3.7%, the largest slide since the immediate aftermath of the pandemic. That decline was part of a broader demand slowdown, which included a smaller-than-forecast advance in personal spending.
While GDP growth beat expectations, details of the report that offer a clearer picture of domestic demand were decidedly weak. Inflation-adjusted final sales to private domestic purchasers, which strip out inventories and net exports while excluding government spending, rose at a paltry 0.2% rate — also the weakest since the second quarter of 2020.
Last month’s retreat in core capital goods orders indicates manufacturing output, which already registered sharp declines in the final two months of 2022, may struggle to gain traction this quarter.
Read more: Weak US Retail Sales, Factory Data Heighten Recession Concerns
The slump in housing is also spilling over into producers of non-durable goods. Shares of Sherwin-Williams Co. tumbled this week after the paintmaker pointed to pressures stemming from a weak residential real estate market and inflation.
“We currently see a very challenging demand environment in 2023 and visibility beyond our first half is limited,” Chief Executive Officer John Morikis said on a Jan. 26 earnings call. “The Fed has also been quite clear about its intention to slow down demand in its effort to tame inflation.”
An accumulation of inventories only adds to the headwinds. Inventory building accounted for about half of the 2.9% annualized increase in fourth-quarter GDP. For the year as a whole, inventories grew $123.3 billion, the most since 2015.
With demand moderating, there’s less incentive to ramp up orders or production as companies make greater efforts to sell from existing stock.
In addition to the aforementioned data, the latest surveys of manufacturers show sustained weakness. Measures of orders at factories in four regional Fed surveys have all indicated multiple months of contraction.
All surveys released so far for this month are consistent with an overall contraction in activity that extends back through most of the second half of 2022.
Next week, the Institute for Supply Management will issue its January manufacturing survey and economists project a third-straight month of shrinking activity.
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