The markets are still doing well despite the fact that many people are unemployed and many businesses aren’t operating anywhere near capacity. People are getting help from the Canada Emergency Response Benefit (CERB) and benefitting from mortgage and other deferrals. But that’s also why the economy may be about to crumble — these benefits will eventually run out.
CERB’s been extended and will continue to help those who are out of work, but it’s not a certainty that it’ll continue. It’s still anyone’s guess when the pandemic will end. And until it’s over, the economy will not be anywhere near where it was before COVID-19 sent not only Canada, but countries all around the world into a tailspin.
The problem is that if the government continues to fund CERB, it’ll only dig itself into ever-deeper debt. But even if it does decide to keep extending CERB, banks likely won’t be as generous and the mortgage deferrals they granted when the pandemic was in its early stages will soon run out. For some people, those deferrals could run out in just a couple of months.
When that happens, that could lead to even greater challenges for the economy. A combination of CERB and mortgage deferrals is helping Canadians get through these difficult times, but as it’s time to start paying mortgages again, especially in expensive real estate markets like Vancouver and Toronto where a $2,000 CERB payment won’t be nearly enough, many people will quickly run out of money.
That would be bad news for bank stocks. Royal Bank of Canada (TSX:RY)(NYSE:RY), for instance, has approved residential mortgage deferrals totalling $47.2 billion. That’s nearly one-fifth of its mortgage balance. While the big banks have built up their credit reserves in preparation for some tougher economic times ahead, the reserves may not be sufficient for a prolonged recession.
And as there’s news of people defaulting on mortgages, that could spook investors and cause a panic in the markets.
What should investors do?
Now is a good time for investors to start getting rid of overpriced and high-risk investment from their portfolios. Buying safe bank stocks or waiting to buy when the market crashes are examples of how investors can be strategic amid these uncertain times.
When the markets crashed in March, shares of RBC fell to as low as $72 — a new 52-week low. It’s certainly possible that the top bank stock can fall to those lows again if there’s concern that people aren’t able to pay bills and mortgages.
Grabbing shares of RBC while they’re near that price point could enable investors to lock in a higher-than-normal dividend yield while also securing a great price for a top bank stock.
One of the reasons RBC is a great stock to hold is that you know that over the long haul, it’ll recover. Even if there’s a recession, the economy won’t stay down forever. And so if you’re holding onto RBC or another top bank stock in the country, you’re probably safe to leave it in your portfolio. But if you’re looking to add stocks, whether it’s RBC or something else, it could be a good time to wait, especially since many stocks are still heavily overvalued.
