2021 Third Quarter Market Outlook
The interest rate trend of long-term bonds is an important indicator in macro economic analysis. The bond investor is often referred to as the “smart money”. What this means is, with bond returns being lower than equity returns, a bond investor can’t afford to be wrong and still make money. This lower margin for error makes correct analysis and investment execution very important.
Recently, interest rate trends have fluctuated more frequently than usual. At the start of 2021, the interest rate on 10-year US bonds was under 1% and over the next few months it rose to just over 1.75%. For fixed income investments this is a big move. The long bond was signaling an economic rebound with higher inflation forthcoming. Recently, those signals have been confirmed with the inflation rate now at multi year highs and good economic strength in North America. With good economic numbers, global stock markets should move higher, anticipating good corporate earnings. However, now the interest rate trend for the 10-year US bond is down and sits around 1.25%. The long bond is now signaling that the recent rise in inflation is transitory, meaning not long term and that the rebound in economic activity may be softening. Only time will tell if this plays out as described. I am being more cautious recently with my investment choices because the “smart money” tends to be correct more times than it is wrong. If long term interest rates continue to fall and go under 1% for the 10-year US bond, the fixed income market is signaling that economic growth will probably be weaker than anticipated.
In summary, global stock markets have rallied over the past year based on the expectation that global economic activity will return to average or even above average growth rates for the next year or two. The recent drop in interest rates for long bonds brings into question how strong the global economic expansion will be. If economic growth is disappointing, then global stock markets will under perform. At this time, I am quite cautious and will raise some cash as the opportunity occurs. If you have any questions or comments, please feel free to contact me.
If you have any questions or comments, please feel free to contact me.
DISCLAIMER
This information has been prepared by Bill Achtymichuk who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this email comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.