After a steep drop in interest rates following the 2008 financial crisis, Canada’s high-interest savings accounts have finally become a viable option for investors looking to safely store and build their wealth in the short to medium term. Prior to the adoption of more competitive rates, it was next to impossible to find a savings account provider offering interest rates above the measly 0.8% to 1% range. Now, you can rest easy knowing that Canada saving accounts offer 2.3% interest!
While it’s true that a savings account won’t net you the same returns as a well structured investment portfolio, you need to remember that the money you put in your savings account is outperforming inflation at no risk to your capital — you simply can’t say the same thing about money that’s tied up in volatile equity markets.
Four Things to Consider Before Putting Your Money in the Market
Projecting and visualizing risk helps you make informed, high-performance financial management decisions. At this point in time, we believe that there are four key market-related risk considerations you need to be aware of if you’re currently trying to decide between putting your money in a savings account or investing in the stock market.
1. A Tiring Bull Run?
As it stands, the Canadian bull market, informally represented by the benchmark S&P/TSX Composite Index, is the longest and best performing bull market in the history of Canadian financial markets.
Nevertheless, no bull market lasts indefinitely and, despite several years of unprecedented stock market returns, there are now well-founded fears that the current bull market is nearing its end. On the domestic front, the factors underpinning a potential pullback in the bull market include:
- External business and trade reliance: Most of the companies that make up the S&P/TSX Composite Index are heavily dependent on an ostensibly strong but deceptively fragile U.S. economy.
- Looming fears of a housing market correction: Despite ongoing affordability concerns, Canada’s real estate market continues to be characterized by low inventory, flagging optimism, and sky-high valuations.
- Excessive household debt: After accumulating approximately $2.16 trillion in household debt, Canada now has the highest debt load (when assessed as a share of GDP) in the G7.
With such a high level of household debt, even minor shifts in the U.S. trade balance or domestic property market could cause major falls across the broader stock market, potentially triggering widespread capital flight and significant value depreciation in the S&P TSX Composite Index.
Now, before you jump in and say it, we know that there’s always someone predicting the demise of a bull market. However, in this case, the sheer number of economic slowdown indicators is assuredly more than enough evidence to begin reducing your exposure to volatile asset classes, especially stocks and derivative instruments.
2. Instability in China and the Lingering Grip of the Coronavirus Saga
Despite encouraging yet unconfirmed reports of a treatment breakthrough, the novel coronavirus is expected to continue wreaking havoc on global markets. In a business cycle where market sentiment is already tenuous, China’s decision to temporarily shutter key factories has caused turmoil in the global economy, sending shockwaves through European, Indo-Pacific, and North American stock markets.
In particular, because of the way global production networks are structured, the disruption in China’s manufacturing and global technology supply chains will likely have a lingering impact on the volatility of North American equity markets. As of the time of writing, 28,349 cases of coronavirus have been confirmed, with 5 known cases in Canada.
3. Trade War Proliferation
Using conservative calculations, the trade war between the U.S. and China has caused tariffs to be placed on a staggering $550 billion in trade, mostly in the manufacturing and agricultural sectors. Despite a promising amelioration in trade war dialogue, investors remain braced against further dips in the U.S.-China trade relationship.
So far, Canada has escaped the worst of the trade war fallout. Nevertheless, if trade tensions begin to re-escalate, the subsequent uptick in destabilising trade actions, be it U.S. tariff conditions or Chinese currency devaluations, will surely ripple into the Canadian stock market.
4. A Threatening U.S. Election Outcome?
President Trump’s impeachment trial may be done and dusted, but the turbulent and seemingly haphazard status of U.S. foreign and trade policy is expected to continue to cast a long shadow over the performance of neighboring equity markets.
Given the level of political polarization and class division currently plaguing the U.S., some commentators have put forward believable scenarios for an outbreak of widespread political violence during and/or following the 2020 U.S. presidential election. If such a scenario comes to pass, even partially, it will very likely trigger a severe pullback in North American stock markets.
The Bottom Line
Unfortunately, the economic issues discussed in this article are not the only potential threats faced by global equity markets. Other pressures on the Canadian stock market include Brexit-induced economic anxiety amongst key EU partners, an all-time-high global debt bubble, and increasingly volatile geopolitical risks in the Middle East and Indo-Pacific.
If you search for a trend amongst this laundry list of market-related risks, what ends up emerging is a veritable powder keg of factors primed to seriously hamstring the Canadian stock market. Given the extent of the underlying risks to your capital, it’s highly advisable to consider reducing your portfolio’s stock exposure and redirecting the funds to a high-interest savings account. In addition to being a risk-free way of storing funds, piling your money into a savings account will also ensure that you have cash on hand to invest in undervalued assets when Canadian stocks eventually enter a bear market.
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