The markets have been going on a bit of a ride in recent days. The reason for the decline seems to be based on disappointing earnings reports of key corporations in the US, implications of tariffs and rising interest rates. For today we’ll focus on the effect of changing interest rates.
- Rising interest rates are a signal that the economy is strong and the government wants to control the rate of economic growth. By increasing rates corporations and people tend to borrow less and thus slows economic growth which in turn controls inflationary pressures. Controlling inflation is a focus of the Bank of Canada.
- These same rising interest rates also give investors a viable alternative for generating income. So some investors will choose to get out of the stock market and move their money to bonds or GICs where rates have improved and tend to be less volatile. Think Retirees!
- Increasing rates also increases the cost of borrowing. If your mortgage is coming up for renewal, you are most likely looking at the higher rates and considering the impact on your finances.
We have talked to clients over the last few years about being prepared for this normal market cycle that occurs. Thus the importance of having the proper asset allocation to ride through the market ups and downs and still be able to sleep at night. This type of market can also create opportunities. Your money manager will be looking for oversold investments and look to take advantage of mispricing. If you have cash on the sidelines that have been waiting for opportunities this may be the time to consider options.
When will the volatility stop, no one knows. The Canadian market is priced similar to back in March 2014. In some ways this could be thought of as Boxing Day for investments.
If you have any questions on how these changes may affect your financial future, do not hesitate to contact us!
