Global equity markets were down almost across the board in September.

The S&P/TSX Composite was down 3.3% and the S&P 500 was down 4.8%, in Canadian dollars.

Yet, despite the recent weakness, they remain positive year to date, with YTD gains of 0.4% and 13.2%, although as mentioned in earlier editions the US market gains are heavily weighted towards the large technology companies because of excitement around artificial intelligence. 

Recent market volatility has been mostly a result of stickier inflation data and the U.S. Federal Reserve’s commitment to higher-for-longer interest rates. The equity markets had expected central banks to already be discussing rate cuts, but that has been pushed down the road for now.   They are still committed to getting inflation back towards the 2% level. 

The news right now is pretty negative, starting with the Israel attacks and the debacle of the US House of representatives with their speaker so it can be easy to get discouraged. 

However, we believe we’re getting close to peak interest rate levels given that we also believe the Fed is nearing an end to their tightening cycle.

Manulife Investments looked at the last six Fed tightening cycles, going back to the early 1980s. In four out of those six instances, the 10-year peaked roughly three months before the last Fed hike.

In one instance, they peaked almost simultaneous, while in another, the 10-year peaked roughly one month after the last Fed hike. Recent history suggests that the 10-year typically peaks within a few months of the last Fed hike.

Of course, nothing is perfect, and we’ve seen short-term spikes in the U.S. Treasury due to shocks. Once there is more certainty with inflation and interest rates as well as whether there will be a recession or not, there can be more clarity with investments. In the meantime there may continue to be volatility. 

What can you do? It really depends on your goals, your time frame and your comfort with risk.

If you need money in a short time frame, then choosing a liquid, secure investment is the right choice. And interest rates are very attractive right now.

If you have a longer time frame, then continue to pick high quality companies. Businesses that have strong management teams, manage their debt well and continue to grow and prosper should lead to strong future investments. 

Fixed income investments have been poor for a long time, but that may be changing. With increasing interest rates, yields on fixed income bonds are much higher than they have been in years. Once interest rates start to decline, bond prices will go up so they are expected to be good investments. They are also meant to be a diversifier if stocks go down.

Alternative investments like private mortgages, infrastructure, commodities, real estate are also good to consider for further diversification. 

If you have any questions, please let me know. 

Source: www.bloomberg.ca