- Jeff Rivett, Portfolio Manager & Senior Wealth Advisor at Creed Capital Management Group at National Bank Financial
After an optimistic start to the third quarter, stock markets reversed course in September, concerned by the steep rise in 10-year yields, which have hit a new high since 2007 in both Canada and the United States.
September was a difficult month for the Canadian fixed-income universe, with its 2.6% drop representing the worst monthly decline since April of 2022. This performance was not specific to Canada, however, as bonds in the vast majority of developed countries posted significant monthly losses as yields rose sharply all around the world.
Global equities retreated in September, against a backdrop of tightening financial conditions via rapidly climbing interest rates and energy prices, plus significant U.S. dollar appreciation. Yet according to the Federal Reserve's latest projections, there's no need to worry too much about rates, as the Central Bank seems to be counting on a "soft landing" scenario.
All economic cycles have their peculiarities. This time, it's the ability of consumers to continue spending with little restraint despite inflation and rate hikes that stand out. However, while the accumulation of excess savings likely explains much of this phenomenon, this trend does not appear to be sustainable.
Mindful of the risk of bond yields continuing to rise in the short term, our investment thesis is that we had reached a point where this would have a greater impact on equity markets, with the risk premium (the equivalent of the price-earnings ratio adjusted for interest rates) at a 20-year low.
There's no such thing as certainty in economics. However, the fact the markets bought into the “soft-landing” scenario over the Summer prompted us to adopt a more defensive stance tactically in early September, which we still consider appropriate. – Jeff Rivett
Annual Market Update video by Jeff Rivett as of September 26th, 2023