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It was a rocky week on Wall Street as panicky traders speculated rampant inflation would force the Fed to raise interest rates by more than ½ point with future bigger increases through the summer. Never mind, Mr. Powell has preached a steady, measured approach to fight inflation. Sadly, skyrocketing inflation stats only served to stir up the pot more vigorously, putting some traders into absolute panic mode. The 10-year bond yield soared through 3% on Wednesday reaching 3.14% today. It may not seem like much, but in dollar terms, bond prices are tanking, which means equity investors had no where to hide except perhaps in cash. It is easy to draw that conclusion when the US 10 year has fallen from a price of $95 on April 1^st and $89 today. Almost brings back memories of the 1994 bond crash. As for the US Dollar index, it has rallied from $98.6 on April 1^st to $103.6. That is something else the US Fed will have to worry about.

Then again, he may be counting on it. A rising US dollar makes US exports more expensive. That will hopefully temper demand and by extension economic growth. However, with inflation running at rates not seen since the 1970’s, expect a few more short-term rate hikes and the corresponding hiccups in stock prices. Our greatest hope is the Fed watches and waits for the economy to adjust before putting in too many rate increases. When I started in the early 1980’s the term used on Wall Street was “three steps and a stumble” meaning central bankers would make three successive rate hikes, not see an immediate change in the economy and jack it up one more time. Unfortunately, the fourth move would break the proverbial camel’s back, sending the economy in a tailspin, forcing the central bank to quickly drop rates. Mind you, in the 1970’s a full 1% hike was almost the norm.

And we must not forget, the Bank of Canada struck first with its half point increase last month and given today’s 5.2% unemployment rate, we should expect another ½ point increase in June too. I would not panic. While there are a lot of parallels between now and the 1970’s (OPEC oil embargoes, the Vietnam war and crushing Japanese exports), the US and Canada have some flexibility to take a slow measure approach to cooling the economy. In the 1970’s energy companies were not prepared to accelerate drilling to replace foreign supplies and today they have the know how and the financial strength to do so. Further, much of the pickup in consumer prices is directly related to supply disruptions courtesy of covid and while China is certainly struggling, it is reasonable to assume, raw materials such as computer chips, will be back on track in six to nine months. Bottom line we still see a bull market in energy stocks which should lead to a recovery in Alberta real estate…unless the rocket scientists in Ottawa figure out a way to derail it.

In the meantime, Canadians are benefitting from the commodities boom in everything from copper and metallurgical coal to fertilizer, soybeans and wheat. Sadly, part of that is due to the horrors in Ukraine plus droughts in India, two of the biggest exporters of grain. This bodes well for Canadian farmers unless floods and droughts also curtail our crop production.

As for our stock market, earnings continue to trickle in, so our stock market is actually only down 2.8% this year. And some of that decline has come from our bank stocks, which should recover as rates edge upwards. CIBC yields 4.6% and BNS yields 4.8%. that is a lot better than short term money market. I admit the new high list has shrunk from 30 odd names to around a dozen today but with utilities, telecom, materials, consumer staples and of course gold and energy sub sectors showing a positive return year to date, we still have opportunities to profit from.

Happy trading and stay safe.

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