Lexicon Financial Group Weekly Update

Monday, December 20, 2021


From our entire team, we wish you all the best for a healthy and happy holiday season! We are taking a brief pause over the holidays and will resume providing your weekly update on January 10, 2022.

 

Looking Back

While the British public were queueing up for rapid COVID tests, its central bank pulled a deft sleight-of-hand trick and unexpectedly announced that it was raising interest rates for the first time in three years. Countries like the UK are still reeling from the economic impact of COVID and uncertainty surrounding the Omicron variant but central banks are now increasingly focused on inflation.

In the United States, the Federal Reserve released a statement (stemming from its recent meetings) that it does not believe that the current inflation levels are transitory, and announced measures to combat inflation. Essentially, it signaled that it would likely increase interest rates as many as three times in 2022.

This is a delicate balancing act. Raise rates too fast and the economy could stall or slide into recession. Raise rates too slowly, and inflation continues to erode purchasing power and creates an uncertain environment in which economic decisions have to be made.

As mentioned previously, we’re in uncharted waters. Across developed economies, employment levels continue to rise, which tends to create an inflationary environment -more people working, more money chasing good and services means upward pressure on prices. The continued supply chain shortages and the new Covid variant, Omicron, are not helping here.

Of note, markets were down slightly this week. The US (as measured by the S&P500) was off 0.01%, while Canadian markets (as measured by TSX) were off by 0.04%. In Europe (as measured by EURO STOXX 50), markets were slightly up, but only by 0.45% (all figured for the four-day period between December 13 and December 16, 2021). (1)

 

Looking Ahead

The Delta variant squashed holiday plans for families around the world in 2020, and this year it looks like Omicron will have a similar effect. How that will impact markets remains to be seen, but officially stock markets in the United States will be closed on Friday, December 24 (because Christmas Day falls on a Saturday)When the trading week is shortened for holidays, there is evidence to suggest that the markets experience increased trading volume. Think of it as cramming five days’ worth of trading and decision making into four days. Whether that will happen or not this year, nobody can predict. Equally important, nobody can predict whether increased trading will lead to higher or lower stock prices. With all the uncertainty in the market, it underscores the continued importance of building a diversified portfolio to ride out periods of volatility.

For example, in calendar year 2020, the energy sector was the worst performing sector in the market, losing -37.31%. Of course, this was heavily impacted by the pandemic. So far in 2021, the energy sector has rebounded and is the best-performing sub-sector of the US market, up 44.04% between January 1 2021 and December 16, 2021. Concentrated risks – the opposite of diversification – magnify the potential swing in portfolio gains. If you make the exact right call, it can result in strong gains, but if you get the timing wrong the losses can be equally large. (2)

 

Looking Around

Back to interest rates for a second. Let’s take a quick look at a real-world example of a raise in rates.

According to the Canadian Real Estate Association, the average home price in Canada was $720,850. Assume a home buyer requires a $500,000 mortgage and current rates are 2.19% for a five-year fixed mortgage with 25 year amortization. Using the mortgage calculator tool offered by Canada Mortgage and Housing Corporation, this works out to approximately $2163 in monthly mortgage payments. A raise in the interest rate to 3.19% increases the monthly payment to $2415. A few hundred dollars a month doesn’t seem like much until you look at the total cost over the life of the mortgage.

In this example, the rate of 3.19% means that this loan will cost the borrower over $224,000 in interest payments over the life of the loan. When rates are 2.19%, the borrower would pay $149,000 in interest. Regardless of where you are financially, $75,000 buys a lot of your favourite whatever!

 

Further Reading

Markets & Investing – Raymond James

Inflation, food shortages, and 8 other ways the coronavirus changed the supply chain

 

The opinions expressed are those of Craig Swistun and not necessarily those of Raymond James Investment Counsel which is a subsidiary of Raymond James Ltd. Statistics and factual data and other information presented are from sources believed to be reliable but their accuracy cannot be guaranteed. It is furnished on the basis and understanding that Raymond James is to be under no liability whatsoever in respect thereof. It is for information purposes only and is not to be construed as an offer or solicitation for the sale or purchase of securities. Raymond James advisors are not tax advisors and we recommend that clients seek independent advice from a professional advisor on tax-related matters.

  1. Data provided by Factset showing the Price returns of S&P500, TSX and EURO STOXX 50 from the period of December 13 up until December 16, 2021 in its respective local currency.
  2. Data provided by Factset showing the YTD, and calendar returns for the energy sector in 2020 and YTD2021, in its respective local currency.

 

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