It’s been a hot summer in more ways than just the weather. The economy, the stock market and the pandemic have all warmed up over the last couple of months. And then there’s the climate. It’s been a season of devastating heat waves, wildfires, droughts, and floods.
When surveying developments on these fronts, it’s natural to focus on the negative and speculate about how things could get worse. However, in doing so, we risk losing sight of all that’s going right, and the possibility things might turn out better than expected.
With this in mind, here are some trends to keep your eye on as the summer winds down and we head into the autumn.
Stock markets continue to fly high
Equity markets in the U.S. and Canada remain at or near record highs. A robust economic recovery, low interest rates and continuing central bank stimulus are keeping the markets buoyant. Are we headed for a reckoning in the fall?
No one can predict future market movements, but it wouldn’t be surprising if there was a correction after such a long period of strong gains. If you have cash flow requirements from your portfolio over the next five years, you should hold at least that amount in bonds (despite the low interest rates) to draw on until markets recover.
To protect portfolios against pullbacks, we diversify broadly across international markets and periodically rebalance to bring asset weightings back to target allocations. We rebalanced all client portfolios in the spring, given the strong stock market returns to that point. If markets continue their upward path, we’ll rebalance again.
When turbulence does hit, it’s important to stay invested because we know investors can’t successfully time the market—getting out when stocks are high and back in when they drop.
You get paid to take the risk of holding equities over the long term only if you don’t have to pull out of the market when things aren’t going well.
Inflation is running hot but there are signs of moderation
There’s been much talk this summer about a surge in inflation to the highest level in over a decade. This bout of rising prices has been generated by massive monetary stimulus, the strong economic recovery and supply chain bottlenecks.
While still high, the latest data suggest that inflationary pressure may be moderating. In Canada, the Consumer Price Index increased 3.1% in June over the previous year, down from 3.6% in May.
In the U.S., consumer prices rose 5.4% in July, the same as the previous month. However, month-over-month core inflation, which exclude volatile energy and food prices, rose by 0.3%. That was under forecast and well below June’s 0.9% increase.
While it’s too early to tell definitively whether inflation is cooling, there are encouraging signs coming from the bond markets. In Canada, the bond market’s implied inflation rate for the next 30 years is 1.7%. In the U.S., it’s 2.3%.
As you know, we don’t think we are smarter than the market, or central bankers for that matter. Both the Bank of Canada and the Fed are saying the current high inflation is likely to be a temporary phenomenon. In other words, they are not overly concerned yet. This doesn’t mean there can’t be surprises in the future, but this is the best interpretation of what we know today.
Vaccinations mean the fourth wave will be different
This was supposed to be the summer when vaccines meant we could return to normal life. However, the highly contagious delta variant has the case count rising, some health restrictions continuing, and public health officials concerned about a fourth wave.
While worries about delta are in the news, this is one area where we shouldn’t lose sight of how far we’ve come in the battle against COVID. Specifically, vaccines are proving to be highly effective, including against the delta variant. The economy has mostly reopened and is growing strongly.
Yes, some vaccinated people are suffering so-called breakthrough infections, but these cases are rare and the symptoms are likely to be relatively mild. The much bigger problem is among the unvaccinated. Federal government data shows that about 99.4% of COVID cases in Canada since vaccination campaigns began in mid-December to late July were either people who were unvaccinated (89.4%) or not fully vaccinated (10%). The fully vaccinated represented just 0.6% of new cases.
This is why governments and private employers are putting pressure on the unvaccinated to get their shots by introducing vaccination requirements for travel, work and entrance to public spaces.
While there are still many concerns, including infections among children, officials expect the fourth wave will be different than earlier ones with much lower rates of hospitalizations and deaths, thanks to the vaccines.
Calls for stronger action on climate change grow louder
Unlike the evolution of the pandemic, there’s little good news to report on climate change. As you probably know, the UN’s Intergovernmental Panel on Climate Change (IPCC) released a major report this month, concluding that climate change will intensify over the next 30 years. It says the world has a small window of time to take action to prevent an even more devastating future.
Against the backdrop of extreme weather events this summer, the report is the most comprehensive and strongly worded warning yet about the consequences of failing to act more urgently to limit global warming.
If there’s any solace to be found in the situation, it’s that governments, corporations and financial institutions finally seem to be taking the climate crisis seriously. While this is positive, it’s clear much more needs to be done at a faster pace.
At a UN climate summit in Glasgow in November, world leaders will discuss how to accelerate the fight. Hopefully this will be the beginning of a renewed push to tackle climate change globally.
Many of our clients have decided to align their investment portfolios with their personal beliefs on the environment and social issues. If this interests you, I am happy to discuss how we could do it in your portfolio.
With that, I wish you a happy and healthy end to the summer and a smooth return to your fall routines in September.