December 2023 update - End of rate hikes…for now

This week saw several major central banks hold their interest rates steady, including the US Federal Reserve for the third consecutive time. In the previous week, the Bank of Canada also left its key rate unchanged, as widely expected by financial media. The latest indicators show that inflation is coming down, if somewhat slowly. In the US, inflation dipped down to 3.1% in November from a year ago. In Canada, inflation was down to 3.1% in October. A major contributor in inflation cooling is the falling price of energy this year. Excluding energy and food prices, inflation in the US held steady at 4%, still much higher than the target of 2%. Grocery prices remain elevated, up 5.4% in Canada.

However, the rate hikes appear to have had only small negative impacts on the economy so far. Unemployment in the US is still at 3.7%. In Canada, it edged up to 5.8%, not as bad as feared. Retail spending in the US was better than expected in November, which means the holiday shopping season should go well. While the US Conference Board’s Leading Economic Indicators index  is due later this week, the OECD’s own economic indicator index is holding steady. Overall, the economy is managing through the rate hikes and the central banks seem to be on track to achieve their goal of a “soft landing”. There is still lots of uncertainty, however. The current interest rates are still a lot for the average consumer, but also for lots of companies that need to refinance their debts. There could still be a slowdown due to the lagged impact of higher rates, just that the timing is uncertain. For now, however, acknowledging that my previous calls for a recession were premature, I believe it is better to go back into riskier assets while recognizing that the ride will be bit bumpy. Where it is possible however, while I believe that junk bonds should perform reasonably well, BB-rated junk bonds have typically offered the best returns with less volatility than other types of junk bonds. So for those who have the ability to do so, investments in that sector should be in BB-rated debt.

Sample portfolio for a Canadian investor

Asset class	ETF ticker	Weight
Canadian stocks	VCN	6.75%
US stocks	VUN	33.75%
Foreign stocks	VIU	27.00%
US corporate bonds	ZSU	0.00%
Canadian corporate bonds	XSH	0.00%
Global high yield bonds	MHYB	12.50%
Emerging markets bonds	ZEF	12.50%
Global real estate	TGRE	7.50%
Canadian mortgage-backed bonds	ZMBS	0.00%
Canadian government bonds	CLF	0.00%
Global government bonds	XGGB	0.00%
Gold	KILO	0.00%

Sample portfolio for a US investor

Asset class	ETF ticker	Weight
US stocks	SCHX	33.75%
Non-US stocks	SCHF	33.75%
US corporate bonds	SPIB	0.00%
Non-US corporate bonds	PICB	0.00%
US high yield bonds	HYBB	6.25%
Non-US high yield bonds	IHY	6.25%
Emerging markets bonds	VWOB	12.50%
Global real estate	REET	7.50%
US mortgage-backed bonds	MBB	0.00%
US government bonds	VGSH	0.00%
Non-US government bonds	BWZ	0.00%
Gold	GLDM	0.00%