For a bunch of reasons, this seems a sensible time to keep cash stashed in safe harbours like savings accounts and term deposits.
Stocks have been surging for a while and could be due for a pullback that melts away money you’d invest right now. The pandemic is easing, but experience suggests you shouldn’t completely discount more negative surprises that could hurt your household financial stability.
Unfortunately, there’s a suddenly strong counter-argument to having money pile up in savings. It’s called inflation, an economic phenomenon that hasn’t been a force to reckon with in Canada for decades. Now, it’s b-a-a-ck. The year-over-year inflation rate in May was the highest in 10 years at 3.6 per cent.
The very best rates on high interest savings accounts ranged from 1 to 1.55 per cent as of mid-June. On an after-inflation basis – your real return, in other words – you’re losing 2.05 to 2.6 per cent. One-year guaranteed investment certificate rates these days top out around 1.5 per cent, which again mean a loss after inflation.
These negative real returns are a sudden shift for savers. Until recently, inflation was so tame that even modest returns from savings kept you at least even with changes in the cost of living. Now, inflation is on the move thanks to surges in demand for certain goods coupled with kinks in the industrial supply chain.
Normally, inflation drives interest rates higher and, in turn, the yield on savings products. But the Bank of Canada wants to keep rates low right now to encourage borrowing that will help the economy recover from the pandemic. The net result is inflation without higher rates for savings, and thus negative real returns for savers and conservative investors.
If you have a strong reason for holding cash, don’t waver. There are plenty of life circumstances where it’s more important to have ready risk-free funds at hand than to worry about negative real returns. Examples: a Plan B fund for emergencies, a down payment fund for a house, a wedding fund and savings for a vacation coming up in the year ahead.
But if you’ve got more immediate plans for your savings, maybe it’s time to start dipping in. Economists say people have been able to save an estimated $100-billion to $200-billion as a result of spending curtailed by pandemic lockdowns. Dismal interest rates combined with rising inflation suggest it’s go time for some of this money.
-- Rob Carrick, personal finance columnist
This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.
Stocks to ponder
Shopify Inc. (SHOP-T) When Shopify became the largest company listed on the Toronto Stock Exchange last year, edging past Royal Bank of Canada, the question of whether the e-commerce company would be able to maintain its powerful momentum gained some urgency. More than 13 months later, investors have an answer: Shopify’s momentum is alive and well, even as the stock’s sky-high valuation remains a pressing concern. David Berman looks at what may be next for Canada’s tech-stock hero.
The Rundown
No house? No problem. Build wealth as a renter with this aggressive investment portfolio
Renting has many drawbacks – lack of control over where you live, eviction risk and you don’t get to build equity in a property you can sell tax-free if it’s your principal residence. But you save a ton as a renter compared with owning by not paying for maintenance, upkeep and property tax. Directing that money into investments over the decades can generate a lot of wealth that is much more liquid than home equity. Rob Carrick gets into some specifics on how to invest as a renter.
Why excess cash in the system may be bad news for investors
That sloshing sound you hear is cash flowing around the U.S. financial system, trying desperately to find a home. Most notably, it is pouring into the reverse repo program operated by the Federal Reserve Bank of New York. The program lets eligible institutions, such as banks and money market funds, park cash overnight at the Fed. The massive upswell in reverse repos can be seen as a warning sign that the Fed’s programs to pump cash into the pandemic economy have gone a step too far. As Ian McGugan tells us, investors should brace themselves for the possibility that the Fed will taper its cash-stoking tactics in the second half of the year, throwing cold water on the stock market’s high spirits.
Amid rising inflation, should mortgage shoppers go fixed or variable? Maybe they don’t have to choose
Barring more calamity, this economic recovery we’re in – one of the fastest recoveries in history – is virtually certain to bring higher rates. That brings us to the perennial question for most mortgage shoppers: fixed or variable? Deep-discount variable rates are now about 0.93 percentage points below comparable five-year fixed rates, nearing the widest fixed-variable spread in a decade. But mortgage expert Robert McLister says that doesn’t automatically mean a variable rate is better. In fact, he has a suggestion for mortgage shoppers that is frequently overlooked.
As Fed wakes sleeping U.S. dollar, jolted bears may bolster gains
A hawkish shift from the Federal Reserve has woken up a slumbering dollar, sending the U.S. currency to its highest level in months and stoking expectations that an unwind of bearish positions could fuel more gains. That, in turn, has sent the loonie and commodities priced in U.S. dollars tumbling. Here’s what market watches believe will come next.
Goldman sees Fed-driven dip in commodities as a ‘buying opportunity’
Goldman Sachs says the recent slip in commodities prices driven by the U.S. Federal Reserve’s decision to bring forward projections for interest rate hikes into 2023 is a buying opportunity for investors. Here’s why.
Even as meme stocks surge, retirement savers stay vanilla
It might seem like everyone is having a wild time shooting for the stars with GameStop and other meme stocks. But just as day-to-day life for most of us is more mundane than the highlights friends post on social media, the majority of retirement savers are sticking to plain vanilla plans. And they’re doing fine for it.
Others (for subscribers)
The highest-yielding stocks on the TSX, plus risk data
Number Cruncher: Nine U.S. health care stocks showing fair valuations, earnings growth
Number Cruncher: Dividend strategy steers clear of U.S. stocks prone to controversy
Friday’s analyst upgrades and downgrades
Thursday’s analyst upgrades and downgrades
Friday’s Insider Report: Two VPs lock in profits by selling this large-cap tech stock
Thursday’s Insider Report: CEO invests over $1-million in a stock that is forecast to double over the next year
Globe Advisor
Compelling environmentally focused stock picks for an ESG world
Are you a financial advisor? Register for Globe Advisor (www.globeadvisor.com) for free daily and weekly newsletters, in-depth industry coverage and analysis, and access to ProStation - a powerful tool to help you manage your clients’’ portfolios.
Ask Globe Investor
Question: I would like to buy an ETF that covers Canadian banks. Any suggestions?
Answer: Here are two that I’ve been recommending.
BMO Covered Call Canadian Banks ETF (ZWB-T) This ETF invests in stocks of the six largest Canadian banks and writes covered call options to generate additional income on top of the dividend payments. It currently pays a monthly distribution of 10 cents a unit, giving it a yield of 5.2 per cent at the current price. The fund is up 52 per cent for the year to May 31 but that’s an aberration. The 10-year average annual compound rate of return of 9 per cent is more in line with what you should expect.
BMO S&P/TSX Equal Weight Banks Index ETF (ZEB-T) This ETF holds an equal weighted basket of the Big Six banks. Unlike ZWB, it does not sell covered calls against the shares, however it too pays a monthly distribution of 10 cents a unit. Because of its higher price, the yield is lower, at 3.3 per cent. But, overall, it has better return than ZWB with a one-year gain of 63.2 per cent and a 10-year average to May 31 of 10.9 per cent.
There are others from which to choose, of course, but I like the two BMO entries best. If you want a different option, take a look at the CI Canadian Banks Income Class ETF (CIC-T). Its structure is similar to ZEB, in that it holds positions in the top six Canadian banks and writes covered calls for extra income. On a trailing 12-month basis, it shows an impressive yield of 7.9 per cent. But writing call options puts a ceiling on capital gains. The fund returned 53.3 per cent in the year to May 31. The 10-year average annual compound rate of return to that point was a shade below 9 per cent.
--Gordon Pape
What’s up in the days ahead
Canadians are borrowing record amounts to play the market, a trend that has long-time market watchers worried it’s another sign that a speculative fervor may give way to a downturn. Larry MacDonald and Darcy Keith will delve into the issue this weekend.
U.S. housing, the BoE and Tokyo’s Olympics preparations: World market themes for the week ahead
Click here to see the Globe Investor earnings and economic news calendar.
More Globe Investor coverage
For more Globe Investor stories, follow us on Twitter @globeinvestor
You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.
Compiled by Globe Investor Staff