Canadian investors may be taking a back seat when it comes to investing this week. Or at least until Jan. 24, when the Bank of Canada will make its next rate decision.
The market currently expects the central bank to hold the key rate steady at 5%. That being said, Canadians should be on alert to watch for signs that rate cuts could come sooner as opposed to later.
With that in mind, here is what investors need to know.
What are the odds?
Pretty much all the analysts out there don’t believe rates will come down this week. So, the question is, when could that happen? The current interest rate swap market, which looks at market expectations regarding monetary policy, puts a 60% chance at a lower rate coming in April.
But when it comes to actual analysts on Bay Street, there is a different tune. Many believe that rate cuts won’t come until June or July instead. All this comes down to stubborn inflation, which climbed to 3.4% in December from 3.1%. This has delayed the timeline for a first rate cut Canadians will have seen in almost four years.
Sticky inflation
According to economists, inflation could remain “stickier” here than in the United States. The Bank of Canada is likely to follow the lead of the Federal Reserve when it comes to the first rate cut.
The key issue, of course, comes down to inflation, but there are certain areas that remain more inflated than others. Shelter costs, in particular, accounted for almost a third of consumer price inflation. Meanwhile, the strain on Canadian costs remains high, with the economy shrinking 1.1% during the third quarter and fourth-quarter results due at the end of January.
Get in or get out?
So, the question now is whether investors should get into the market during this period or get out. Of course, here at Motley Fool, we pretty much always say get in but get in long term. However, this doesn’t mean getting in on absolutely any stock.
This is why it’s important to consider sectors due to recover in a lower inflation and interest rate environment. In the near term, this could provide investors with a deal when it comes to purchasing stocks long term. And then, in the long term, you’ll see shares absolutely soar.
One sector to consider? The lumber industry.
Stocks to buy
Pure-play lumber companies offer investors exposure to both the United States and Canadian housing recovery. While not here yet, it will certainly come soon. By 2025, there will likely be a major increase in housing demand. And there is one stock to consider during this recovery.
West Fraser Timber (TSX:WFG) should outperform this sector during a market recovery and perhaps even sooner. Investors can gain large-cap Canadian equity exposure to both the lumber market recovery and other wood products. This would include pulp and paper products that are likely to increase in demand when consumers start shipping in products once more.
After a major acquisition back in 2021, there is a far more diversified portfolio for investors to consider. WFG stock is also one of the lowest-cost products in the sector, leading to some of the best margins in the industry. So, with a strong balance sheet and a recovery on the way, lower interest rates could mean high returns for today’s investors.
