Lexicon Financial Group Weekly Update

Monday, November 1, 2021

 

Upcoming Event

November 2: Before the Business Podcast, Episode 7: Small Winemakers Collection (available on all major podcast platforms and online)

November 4, 11AM EDT. Fireside chat with Amy Steciuk, Portfolio Manager with Cougar Global Investments.


Looking Back

It’s not often you’ll hear me use the words “exciting” and “fixed income” in the same sentence, but I have to make an exception this week. That’s because on October 27 the Bank of Canada made an announcement. Markets generally anticipated the announcement, but policy decisions like this are studied closely as it has an impact on how portfolios are positioned moving forward. What markets perhaps didn’t anticipate was how strong the Bank was in projecting that it will continue its current path, keeping interest rates low. For those watching the equity markets, the Bank of Canada also predicted that global GDP (gross domestic product, a measure of economic growth) will grow by 6.5% in 2021 as economies recover from the impact of COVID-19. It also anticipates 4.5% global growth in 2022 and 3.5% in 2023. FYI: The next full update from the Bank of Canada and their outlook on the economy and inflation is due in January, 2022.

I’m not naïve. The Bank of Canada does not set policy for the entire world. That said, the trend certainly looks like interest rates will remain stagnant for the next few months around the world as things re-adjust to economic reopening, but higher rates are expected in 2022. Central governments will have to be careful to not raise rates too quickly, which would cause some downward pressure on markets as higher rates might draw money out of the equity market and into fixed income.

Between October 25-28, 2021, the S&P500 index in the United States was up about 0.66% while the bellwether benchmark in Canada, the S&P/TSE, was down slightly at -0.41%.(1)

 

 

Looking Ahead

It’s hard to believe, but we’re already at the end of October. Key things to watch for next week will be to see if the US Fed holds interest rates steady as many analyst predict they will do. The Fed is expected to announce that they will begin tapering – reducing – the amount of stimulus that is has been putting into the economy by purchasing assets, especially treasury bills. This economic stimulus began in 2020 due to the fears related to the COVID-19 pandemic. Now, inflation is a concern and slowing down economic support may help put a dampener on that.

The trouble is that inflation is directly related to supply and demand. And if my university economics professor Dr. Sohrab Abizadeh taught me anything, it’s that when you have more demand for something than supply, prices remain high. Right now, there are major supply-chain issues and many goods are in short supply. Just ask anybody who is trying to buy a new car, a bike or a Playstation 5 (yes, that would be me).

Two months ago we couldn’t stop talking about China, today we’re talking about energy, leaving some to wonder if we are just going to have to live with higher energy prices over the long term. Gas prices have soared in Europe and Asia on supply concerns. The upside of this is that is also creates an opportunity for innovation as companies see an opportunity to step into the supply gap. Indeed, in many respects Europe is already ahead of North America when it comes to use of renewable energy technologies as it pursues its goal of becoming the world’s first climate-neutral continent by 2050 through the European Green Deal. What’s remarkable is that the natural gas shortage is tied to a greening economy, as natural gas is less polluting than other traditional fuels.

The impact of increasing energy prices has certainly been a factor in driving up inflation. The chart below reflects the price of oil from Dec 31, 2020 to October 29, 2021. You can see that in that period of time it has climbed from just below $50/barrel to over $80/barrel. (2)

Further Reading

 

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 return of S&P500 and TSX for October 25-October 28, 2021 in its respective local currency.
  2. Data provided by Factset showing the price of WTI Crude Oil (IFEU $/bbl) from Dec 31, 2020 to October 29, 2021 in USD.

 

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