July 8, 2023

On Friday, the S&P 500 was down 0.3% while Toronto was up 0.1%.

Next week’s excitement will be whether or not the Bank of Canada increases its interest rate by another 0.25%.

The market expects an increase and that in part is why the yield on a five year government of Canada bond poked its nose over the 4.0% level on Friday. It’s now at the highest level since late 2007 just prior to the financial crisis.  That yield was under 1% in 2016. And with the pandemic panic in 2020 it was at about 0.3% for about nine months. The increase in the past two years has been epic.

It seems clear that higher interest rates are driving a huge transfer of wealth from debtors to savers. And I suspect many corporate and personal debtors are going to end up bankrupt. But it does not appear the markets are concerned so far about the impacts of those bankruptcies.

At this time most investors should probably be tilting their portfolios more in the direction of safety especially if they have been over-exposed to riskier allocations. Even cash now pays you to own it so it seems logical to have a higher allocation to cash. And GICs and all forms of fixed income now pay you more to hold them and so it makes sense to have a reasonable allocation to fixed income.

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