The last couple of weeks have been interesting ones for the financial markets. I am a firm believer in the rally we have been experiencing in high quality companies. Many corporations have extremely sound balance sheets and are making record profits despite what the news is saying. Also, we have seen a significant bounce back in US housing. This should form the backbone of a full recovery since it makes all of us who own homes much more confident in the future (and feeling wealthier).
The recent market movements have been caused mainly by what is going on in the bond market. In short, bonds do not like uncertainly or rising interest rates. Last week there was a bump up in the interest rate needed to sell the 10 year US treasuries. When rates go up all existing interest bearing investments look less attractive and they fall in value.
It is not just bonds that are affected by a potential rise in rates. Other investments that look much like bonds are also at risk of losing value since these investments are purchased mainly for the return (in the form of interest or dividends). Utility stocks like Fortis or Emera are examples as are preferred shares.
Investors in this market have to be well aware of where the challenges and opportunities lie. Interest bearing investments have such low rates of returns that they offer little upside and a potential loss in value if rates rise.
A great way to protect holdings in this market is to seek out companies that have a record of increasing dividends. This dividend growth will counteract the rising rates and history has shown that dividend growing companies vastly outperform in a rising interest rate environment. As mentioned, many corporations are flush with cash and if they increase dividend distributions the share prices should rise.
I hope that the above summary gives you some food for thought. Interest rates have not moved yet but it is always best to make adjust before it is too late. Last week’s market movement indicates that the smart money sees a rise on the horizon.
Please let me know if you have any questions.
John Woodfield, B.Comm, CFP, CIM, FMA, FCSI│Raymond James Ltd.
1.877.979.2700, 250.979.2744, 604.654.1502
The views of the author do not necessarily reflect those of Raymond James. This is for information only. Raymond James Ltd. Member-Canadian Investor Protection Fund