March 16, 2021
The threat to our finances seemed as dire as the danger to our health when the pandemic took hold a year ago.
The Canadian stock market plunged by one-third in just four weeks. Interest rates sagged to levels where many conservative investments paid close to nothing and supposed storehouses of value, gold and the newcomer bitcoin, fell in price. And then began one of the most surprising developments in the pandemic – a wave of financial prosperity washing over households fortunate enough to have not lost jobs or income in the fight against COVID-19.
Almost everything’s golden for financial assets today – except, well, gold. But a new set of worries are emerging as we look ahead to the postpandemic world. Here are four of them to watch:
Economists and investing strategists argue over whether inflation will be a problem as the economy ramps up. It’s widely expected that we will see a temporary period of rising prices – the question is whether we’re heading into a longer-term period where inflation is higher than a range around 2 per cent that was typical in the prepandemic world.
For now, the big concern for households is something we’ll call microinflation – cost increases that have a noticeable effect on an individual’s or family’s spending but get watered down in the national inflation rate.
The 2021 food price report from the Agri-Food Analytics Lab at Dalhousie University predicts overall food price hikes of 3 per cent to 5 per cent. Expect higher prices at restaurants, too. A rising demand to dine out postpandemic would give them leverage to raise prices and recoup lost revenue. Maybe you’ve already noticed higher costs for takeout food – I have.
Anything in high demand as the pandemic eases could be subject to inflation – travel, entertainment and improvements for all the homes being purchased. Overall, expect the effects of microinflation to affect both your discretionary and non-discretionary spending.
SOARING HOUSE PRICES
I’ll say more about this in a coming column, but the housing boom has turned ugly. Prices have soared way beyond incomes and the low mortgage rates that allowed this have already started to edge just a bit higher.
The housing market supports the economy, so its good health is vital. But there’s a frenzied aspect to what’s happening in some cities that raises concern about a bubble and is certainly leading to some bad financial decision-making. For example: Bidding way over the ask price on a property you know nothing about because you can’t make your offer conditional on a home inspection. Or, spending the maximum you can afford on a house, with not much slack for the additional costs like daycare.
Young adults are being priced out of the market and they’re justifiably angry at the prospect of becoming the first generation to forgo home ownership over the prohibitive cost. Housing could emerge as a big issue in the next federal election, but how do you address affordability for young buyers without spillover effects? Help specifically for them can juice the market further, and tougher rules to qualify for a mortgage would in the near term hurt young buyers the hardest.
The question isn’t whether the stock market is going to crash. The major stock indexes rise and fall over the years – it’s normal and fine if you plan properly. What’s concerning is that so much money today is going into risky, speculative investments that are based more on hype and positive sentiment than investing fundamentals like proven profitability.
Lots of money has been made in speculative investments in the past year – all credit to the people who participated. But when the next reckoning comes for stocks, quality investments will take less of a beating.
Every generation has to learn this lesson, but the young adults who have been out front of the retail investing boom of the past year are particularly vulnerable. They’ll need to be steady investors over a lifetime to achieve financial goals such as a comfortable retirement. We don’t want these young investors to sit out the five years after the next market crash to recover their confidence.
RISING INTEREST RATES
TD Economics has estimated that Canadians accumulated an extra $200-billion in savings last year as a result of economic lockdowns to fight the pandemic. A lot of the money is in savings accounts, where rates are low and likely to stay that way for a while.
But we do see rising rates in the bond market, where five-year Government of Canada bonds set the trend for five-year fixed rate mortgages. The yield on these bonds has more than doubled in 2021, a huge move by bond market standards. There are implications here not only for buying homes and renewing mortgages, but also taxpayers.
Governments borrowed hugely to keep the economy moving during the pandemic and, with low rates, the cost was thought to be manageable. Rising rates increase the cost of servicing government debt, which in turn makes it harder for Ottawa and the provinces to contain their spending in the post-pandemic world. Two obvious solutions if rates keep rising: Spending cuts or tax increases. At very least, the progressive policies thought to be in play for the postpandemic world could be shelved.
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