Inflation Rising Interest Rates Volatile Markets New Norm

Inflation, rising interest rates, and volatile stock markets will be the new norm. Meantime, on January 25, Bank of Canada reprieved Canadians by deferring the first interest rate hike to March 2022, keeping the target for the overnight rate at 0.25%. Get ready for a series of rate increases: 

“Everybody should expect interest rates to be on a rising path … A path is not one move. A path is a number of steps.” Governor, Bank of Canada,  Tiff Macklem, January 25, 2022

 

Unprecedented low rates fueled a debt binge by Canadians since 2008. Canada’s household debt to income ratio continued its steady rise up to the start of the pandemic, to about 177%, but declined in the early pandemic days. Then it surged after 2020 at about 8.6% yearly increase, the largest rise since the 90s.

Meanwhile, Canada continues with the highest debt service ratio in G7 countries.

Not surprisingly, Canadians are feeling insecure about their finances. These data reported by MNP LTD, a division of the national accounting firm MNP LLP, confirm Canadians’ grim situation:

45% not confident they can cover living expenses this year

40% concerned about their current level of debt

27% confident in their ability to cope with unexpected events without increasing their debt burden

20% believe their current debt situation is worse than it was a year ago

Source: MNP Consumer Debt Index, was compiled by Ipsos on behalf of MNP LTD between December 1-7, 2021

Housing prices have been soaring making owning a home without a lifelong “debt-sentence” impossible for the average wage earning. Interestingly, new home prices climbed during the pandemic.

Canadian New Housing Price Index
Canadian New Housing Price Index

Inflation is at a 30 year high, interest rates rising, and stock markets volatile. And the federal minority government will do anything to cling to power in the next eighteen months, including actions that exacerbate inflation and spook stock markets. Still, stock markets have been resilient over the past several years. For instance, the Dow has been soaring consistently for decades with momentary pauses. The challenge we face is we can’t time the falls, and too many folks panic and exit without a plan. 

Dow Jones 10 Year Daily Chart - Source: MacroTrends.Net
Dow Jones 10 Year Daily Chart – Source: MacroTrends.Net

Response to Interest Rates Hike Inflation Volatile Stock Markets

A key response when your stocks lose value is to stay calm; don’t sell because the market plummets. In fact, don’t sell because the market rises, either. You lose funds only when you sell below your cost, and you gain when you sell above your cost. Here are four reasons to sell your investments:

  1. You reached your preset goals: Exit when this happens.
  2. Your investment goals change: If your goal changed, get out; don’t time the market.
  3. Conditions you expected no longer exist: As in two, leave; conditions might worsen.
  4. You made a mistake, and you need invested funds: Exit when you know you made the mistake. It is never too late to correct this error.

Besides, if you are within five to seven years of retirement, don’t invest in the stock market. If you have bonds ensure they mature within five years. Don’t time the market. Resist greed attacks and the urge to follow the herd. Instead, place funds where short-term market gyrations will not affect the principal. Sure, returns will be small, but remember this adage, “high risk, high return, low risk, low return.”

How might Canadians respond apart from investments? Unlike governments who spend irresponsibly with tax dollars without real consequences, the public has few options. The primary response must adjust spending by tweaking lifestyle decisions; we must tame the debt monster with our choices.

A key lifestyle change needed is how we think about home ownership. We must remove the stigma from renting. It is fine to rent, especially today in Metropolitan areas like Ontario and British Columbia where prices are outrageous. Owning a home today in some Metropolitan areas can be a nightmare. You have your home but must curtail all activities and spend the next several years not only paying down your mortgage but servicing home ownership costs: insurance, taxes, upkeep, major repairs.

It’s ironic that society pushes home ownership, but when people pay off their mortgages, firms coerce them into reverse mortgages, a euphemism for using your home’s equity as an ATM. This can be seductive, but sometimes it is a bad idea.

As you await creeping interest rate increases, stress test your finances starting with this personal finances check up. 

© 2022 Michel A. Bell

SEE ALSO:

10 Reasons People Spend More Than They Earn Consistently

Build affordability in spending decisions

Affordability and Buying a Home

Michel A. Bell

Michel A. Bell is a former senior business executive, author of six books (including Business Simplified released in 2018), speaker, and adjunct professor of business administration at Briercrest College and Seminary. Michel is a Fellow of the Chartered Certified Accountants (UK), holds a Masters of Science in management degree from Massachusetts Institute of Technology and a Doctor of Business Administration honoris causa from Briercrest College and Seminary. He is founder and president of Managing God's Money.

Leave a Reply

Your email address will not be published.

This site uses Akismet to reduce spam. Learn how your comment data is processed.