Woman at the peak of a hike looking out over a lake and mountain

In just a few months – July, to be exact – it will have been a full year since the Bank of Canada’s last interest-rate hike: a 0.25% increase, to today’s level of 5%. That’s a 23-year high. As of today, some economists predict the first cut will arrive in June.

But of course, predictions can – and often do – turn out to be incorrect. And there’s reason to believe rate cuts could come later (or be smaller) than forecast. Recent figures from Statistics Canada, for example, show that the country’s economy grew a strong 0.6% in January, followed by still-robust growth of 0.4% in February.

That suggests the economy can withstand today’s rates, at least for a while longer, and puts less pressure on the Bank of Canada to cut in the near term. So it’s only prudent to be ready if rates remain at these levels for a while, or only fall slightly.

Here are some strategies for such a scenario, separated into four important categories for just about every investor: investments, mortgages, budgeting and financial planning.

Investments: What to make of stocks and bonds – plus another “rate smart” option

Rising rates tend to push down bond prices and increase bond yields. So now, with rates likely near a peak, could be a good time to consider government and corporate bonds. Moreover, many bonds offer coupon rates – or the rate the issuer will pay the bondholder from the bond’s issue date to its maturity date – in the 5% to 6% range. Purchasing bonds now also opens the door to potential capital gains when rates eventually move lower.

Another option: preferred shares, which we can think of as a stock that behaves, in many ways, like a bond. A benefit here is that dividends from eligible Canadian corporations – including preferred-share dividends – qualify for the dividend tax credit and are therefore taxed at a lower rate than income from bonds. Right now, it’s possible to get yields of 5% and higher on preferred shares.

Finally, let’s talk about the stock market. Since the start of 2023, stocks have rallied, with the S&P 500 up 36% as of this writing, while the TSX Composite Index has gained about 14%.

Those gains suggest stocks may not have much more growth ahead in the near term. But there are a couple things that could add further gains. First, the S&P 500’s gain has been largely driven by the so-called “Magnificent Seven” tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – the types of firms we don’t have in Canada. Without those stocks, the S&P 500’s gains are significantly lower.

Second, many investors are still holding funds outside the market, in liquid assets such as money-market funds. According to financial research firm Fundstrat, these funds could total around $6 trillion in the US. As rates move lower, money-market funds, term deposits and similar investments will yield less, and stocks could benefit as these investors seek higher returns.

At the end of the day, the best approach is to stick with (or put together if you don’t have one) a financial plan built with the help of an advisor. Our BlueShore Wealth advisors can provide a vital outside perspective on whether (and how) assets like stocks, bonds and preferred shares fit your portfolio, in a way that matches your age, goals and risk tolerance.

Mortgages: Longer term may make sense in a “higher-for-longer” world

In 2020 and 2021, mortgage rates below 2% rates were available. Now, many five-year fixed-rate mortgages have rates around 5%. That sharp increase has raised a lot of concern among homebuyers and those whose mortgages are coming due for renewal.

So what are some potential moves here? One option for those who can tolerate more risk could be a variable-rate mortgage. These feature rates that are tied to the Bank of Canada’s policy rate and so will move lower as the central bank reduces rates. Five-year variable rates are now considerably higher than those on a five-year fixed-rate mortgage, however, so you should be confident that rates are going to fall significantly before choosing this type of mortgage.

In the past couple years, many people have opted for fixed-rate mortgages with terms shorter than five years, such as one or three years. Rates on these are higher than those on a five-year fixed-rate mortgage, but the case for doing this is that homeowners will more than make up for this when they renew and opt for longer terms, after rates have (hopefully) moved lower.

In today’s environment, that strategy could still be effective. But if you crave more payment certainty, a five-year fixed-rate mortgage may make more sense, especially if rates move only slightly lower from here in the longer run. But here again, this is something best discussed with a financial advisor.

Budgeting: Use this time to build a reserve

Now, with the Canadian economy still growing strongly but rates remaining historically high, is a particularly good time to add to cash reserves in case you experience a job loss (note that many companies are cutting costs as high rates prompt customers to reduce spending) or slowdown in your own business.

Then, of course, there’s the possibility that ongoing high rates will push the economy into a recession (which would likely lead to a rapid drop in rates).

Let’s stop here for a second, because predictions of a recession – like predictions of rate cuts – have been made a number of times over the last couple of years. But a recession will arrive at some point, so adding to your emergency fund today, while the economy remains buoyant, is prudent.

This way, if recession predictions turn out to be wrong, you would be left with more money to invest in stocks, bonds, preferred shares, real estate or other assets, in whatever mix fits your plan.

A client meeting with an advisor in branch

Financial planning: Revise inflation baselines – and resist headline-driven moves

If you have a financial plan but haven’t revised it in a while (or if you don’t have a plan), now is the time to speak to your advisor. They can project your income and expenses for the next 25 years, so you can see how changes in the economy could affect your future working years – and your retirement.

The biggest variable? Inflation. For most of the last couple of decades, low inflation has been the baseline assumption – in the neighborhood of 2%, say. But these days, with ongoing shortages in labor and certain raw materials, elevated inflation, in the neighborhood of 3%, say, could become the norm.

Your advisor can work with you to adjust your plan to account for this, either by shifting your investment mix, helping you cut costs, boosting other income sources or a combination of these.

A final word on predictions: As we’ve seen, even the best forecasts can be incorrect. That’s why a financial plan is critical. A well-crafted plan will help you resist the urge to invest based on short-term headlines and stay on course to achieving your financial goals. Contact your advisor to make sure yours is designed to do just that.

BlueShore Financial, Financial Advisor, Nico Wong

Nico Wong

Financial Advisor

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† Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc.