The Bank of Canada (BoC) might be ready to consider its next big move after taking its time through a fairly lengthy pause. Indeed, given inflation remains more heated, especially with higher energy prices, it seems like the door to cut interest rates is closed, at least for the time being. Combined with a labour market that’s in a fairly uncertain spot (it’s not as heated as it could be) and the potential for a so-called “technical recession” period, and it feels like more of a hawkish pause is still on the table.
A slight tilt towards being more or less hawkish, with rate hikes likelier than rate cuts, but still, a pause until more economic data has a chance to flow in. Of course, there is risk in a hawkish pause rather than hiking rates to prepare for what’s likely just around the horizon. Inflation has proven quite sticky, and if 4% ends up being the new 2%, things could get nasty quite quickly.
For now, Canada’s labour market isn’t nearly as booming as the U.S. one, but whether that’s enough to justify rate cuts or a more dovish pause, though, remains the big question. Even if Canada’s labour market softens, I think the Bank of Canada might already be at a floor for rates. In my view, inflation is too hot, and the biggest risk could lie in a return of unacceptably high inflation, especially at the grocery store. Whenever meat and vegetables are marching higher by a rate far exceeding inflation, hawkishness, I think, might be the move, regardless of how the employment situation looks.
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What I’d do as an investor as others bet on the Bank of Canada’s next move
In any case, I think investors should, as always, not pay too much attention to what the Bank of Canada is saying or doing at any given time. If we’re due for a pause at the next big meeting, I think investors‘ best move is simply to be invested.
If you’re on track, stay the course; and if you’re worried about a big stock market pullback at the hands of an AI bubble, I’d argue that insisting on value in some of the less-loved corners of the market could make sense. In my humble opinion, the market isn’t all that expensive when you take out the parabolic-movers within the U.S. AI scene.
Any way you look at it, owning the market (either the TSX Index, the S&P 500, or both) is hard to argue against. For those willing to pick their own stocks, though, I think there’s more opportunity underneath the hood of the markets.
The stock market might be running hot, but not everything is nearly as heated. A stock market is a market of stocks, and for those who can take a pass on what’s expensive while buying what’s cheap-to-fairly valued, I do think one can do extraordinarily well, regardless of what rates end up doing next or what kind of commentary the Bank of Canada will have.
Banking on banks as the Bank of Canada stays on hold
In my view, the BMO Equal Weight Banks Index (TSX:ZEB) looks like a great way to capture a part of the Canadian economy that’s firing on all cylinders. Spreading bets across the banks might be the move, especially if we’re on the cusp of a multi-year bull run in the space, lifted even higher by not only industry tailwinds, but structural AI-driven ones. The ZEB might be overheated, but a pullback could be the perfect time to pounce, maybe even with a TFSA. If rates stay put, as they’re expected to, I think the banks are well-positioned to keep on winning big.
