Investors had lots to cheer by the end of Q1 as stocks rallied, bond yields fell, central bank hiking slowed and inflation cooled again. It’s a promising start to 2023 but there were a few shocks along the way.
Equity markets dipped in February over concerns that “hot” economic data coming in might mean Fed interest rates having to stay higher for longer. Then in mid-March there was a scare as U.S. regional banks Silicon Valley Bank (SVB) and Signature Bank were forced to close which dragged down banking stocks (CLICK HERE to learn more about what happened with SVB and why it collapsed). However, following a coordinated response by central banks to maintain market functionality, liquidity and protect deposits, Canadian, U.S. and global equities recovered to wrap up Q1 with impressive gains. The tech sector led the way, offsetting banking volatility. It was also a bright beginning to 2023 for bond markets as prices rose and yields fell on more signs inflation is easing and as a result lower expectations for interest rates.
There were several market-friendly Canadian and U.S. economic indicators during the quarter. Job creation on both sides of the border continued to be resilient. Canadian retail sales rose, and home sales slowed while U.S. GDP grew a respectable 2.7%. There was promising economic news overseas as well. Surveys of manufacturers, the services sector and consumer sentiment in the U.K. and Eurozone revealed an improved outlook and an easing of supply chains. Economic activity is also picking up in China as it reopens for business after lifting its “zero-covid policy” pandemic restrictions. Chinese manufacturing in particular moved back into expansionary territory which global markets responded to positively.
The Canadian federal government released its 2023 Annual Budget at the end of March. Highlights included health and dental care spending, green initiatives, a grocery tax rebate. It also featured proposals to raise the alternative minimum tax rate (AMT) threshold and increase limits for some RESP withdrawals.
U.S. inflation cooled for the third consecutive quarter, from 7.1% to 6% as prices for goods and energy continued to stabilize. This was still higher than hoped due to food and housing costs remaining high, but the underlying details remain consistent with trending disinflation. The Fed raised its target interest rate by a smaller 25 basis points twice during Q1, from 4.5% to 4.75% in February and to 5% in March. Fed chair Powell indicated the end of its tightening cycle is near, adding that a soft landing for the U.S. economy, as opposed to a recession, is still attainable. He also stressed the Fed would be prepared to increase rates further if tighter financial conditions do not effectively slow economic activity.
Inflation moderated in Canada as well, from 6.8% to 5.2%, the largest deceleration since April 2020. According to Statistics Canada this was mainly due to lower gasoline prices although grocery and mortgage interest costs continued to rise. The Bank of Canada raised its benchmark rate 0.25% to 4.50% in January. Bank governor Macklem then indicated rate hikes would be on hold to assess the effects of hiking so far. He added, if needed, the bank would hike again to get inflation back to the 2% target.
What can we expect now?
Thanks to a swift response from central banks, the recent banking troubles have likely been contained. The probability of a global economic slowdown has risen due to tightening credit conditions, which should lead to decreased spending and lower prices. The rate increases over the last year have a delayed impact so are still gradually impacting the economy and monetary policy decisions. The likelihood of interest rates moving lower by the end of 2023 is increasing, potentially setting the stage for the next bull market.
Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term goals. This strategy helps you keep your emotions out of investing, and to avoid the pitfalls of buying high and selling low like so many investors do during periods of temporary market volatility. Ongoing monitoring and reviewing of your portfolio also ensures it remains on track. Diversifying investments reduces risk as well.
Sources: CI Global Asset Management, Statistics Canada, Bank of Canada, Bloomberg, U.S. Bureau of Labor Statistics Reuters, National Post, Global and Mail, Investment Executive, Advisor.ca, Wall Street Journal, Toronto Sun, LinkedIn, MarketWatch, Investing.com, Canadian Press, MSN, and Barron’s
Financial Planning Tools and Calculators
As a valued client of Perfect Timing Family Wealth, we want to remind you of the importance of staying on top of your financial planning. To help you do this, we offer several tools that can be integrated into your planning/review schedule and regularly updated to ensure you are on track to meet your financial goals.
Our Investment Forecasting Model is a powerful tool that allows you to project the future value of your portfolio based on various scenarios. This can help you make informed decisions about your investments and adjust your planning accordingly.
Our Net Worth Assessment Tool is another valuable resource that can help you understand your overall financial position. By tracking your assets and liabilities, you can get a clearer picture of where you stand and identify areas for improvement.
Finally, our Wealth Depletion Calculator can help you estimate how long your savings will last in retirement. By factoring in variables like inflation, reasonable rates of return and future costs of assisted living, you can better plan for your retirement years.
We encourage you to contact us to discuss these tools and how they can be integrated int your financial planning process. Regular updates and review of these documents will ensure that you are always up-to-date with your financial plan and making informed decisions with confidence.
Importance of Estate Planning
Estate planning is the process of preparing for the transfer of one’s assets to their beneficiaries either while living or when they pass away. However, one critical aspect of the estate planning process that often goes overlooked is assessing the tax liabilities at the estate level before assets are distributed to the named beneficiaries. Depending on the size of the estate, tax at time of death can be significant, potentially eating away at the value of the hard-earned assets before being passed on to your loved ones.
By proactively addressing estate tax liabilities, one can help to maximize the inheritance being left to their loved ones and also minimize the stress and confusion that can arise when it comes to distributing assets after a loved one passes away.
As your Financial Advisors, we have the tools and expertise to assess your estate tax liabilities and design cost-efficient, tax-smart strategies to address them. We invite you to contact our office to learn more about how we can help maximize what you leave behind for your loved ones.
2023 Tax-Free Savings Limit
Just a friendly reminder that the new annual TFSA contribution limit for 2023 has increased to $6,500.
With this TFSA dollar limit announcement, the total contribution room available in 2023 for someone who has never contributed and has been eligible for the TFSA since its inception in 2009 is $88,000.
For those who have contributed before, you can find your remaining TFSA and RRSP contribution room in your Notice of Assessment or through your CRA account online.
2022 Tax Filing
All tax slips and receipts were issued by plan administrators and fund companies by March. With only a few weeks left to file for the 2022 tax year, please contact our office at 416-861-9556 if you have not received all of your tax documentation and we can arrange to have duplicates sent to you.
Here are a few useful tips and resources to help with your 2022 tax filing:
- Fidelity Investments – File Your Taxes in 5 Simple Steps
- TurboTax – The Procrastinator’s Guide: 7 Last-Minutes Tax Filing Tips
- Mackenzie Investments – 10 Tax Filing Tips
This quarter’s recommended read
In The Psychology of Money, award-winning author Morgan Housel shares 19 short stories exploring the strange ways people think about money and teaches you how to make better sense of one of life’s most important topics.
Your Family, One Office, You First™
We sincerely appreciate your trust and in order to emphasize our commitment to you, we have created “Our Client Service Promise”. Click Here to see Our Client Service Promise on our website.