In September, the markets – specifically, the TSX Composite – experienced quite a fall, dropping 3.7%.1 Things got spookier in October, when the TSX dropped 3.4%. 2
In November, however, the markets found something to be thankful for: A better-than-expected inflation report. The result was a major bounce back, with the TSX climbing 7.2% for the month. 3
As you know, Canada has experienced dramatically high inflation for some time. Things peaked in June of 2022, when the Consumer Price Index – which measures the year-over-year price change of a wide variety of common goods and services – reached 8.1%.4 Since then, a combination of rising interest rates and improving supply lines gradually cooled prices down all the way to 2.8% this past June.4 (For reference, the Bank of Canada, which is tasked with keeping prices stable, aims for a 2% rate of inflation.)
Over the next three months, however, inflation crept back up to 4%, largely due to a rise in oil prices.4 This spooked the markets badly, as it worried investors that the Bank would keep raising interest rates, or at least keep them higher for longer.
In October, however, inflation fell back to 3.1%.4 This was slightly better than expected, and it proved to be a shot of adrenaline for investors. Most analysts feel it means the Bank will not raise interest rates for the foreseeable future, as it appears inflation may already be coming back down again without the need for further rate hikes.
Here's What We're Keeping an Eye on In December & Beyond
This is all undoubtedly good news, but it also signals a need for caution. Whenever the investors hinge on every bit of new data, or the release of every government report, the markets can swing one way and then the other very rapidly. For example, investors will be closely watching consumer spending over the holiday season. Spending is part of the lifeblood of our economy. If higher interest rates put a winter chill on holiday spending, investors may take it as a sign of an economic slowdown. That would certainly affect the markets negatively. On the other hand, if spending goes up, or at least remains stable, we may see this market rally continue. Either way, we should be prepared for more volatility in the months ahead. The markets are like a swinging door right now. As we enter a new year, we must continue to be mindful so that we never get taken by surprise…or hit square in the face.
[1] “TSX ends 3.7% lower in September as bond yields jump,” Reuters, https://www.reuters.com/markets/tsx-futures-rise-commodity-surge-economic-data-focus-2023-09-29/
[1] “TSX ends higher; still posts third straight monthly decline,” Reuters, https://www.reuters.com/markets/canadas-economy-flatlined-august-minor-contraction-seen-third-quarter-2023-10-31/
[1] “TSX posts biggest monthly gain in 3 years on Fed rate signal,” Reuters, https://www.reuters.com/markets/tsx-futures-rise-higher-crude-prices-bank-earnings-us-inflation-data-focus-2023-11-30/
[1] “12-month change in the Consumer Price Index,” Statistics Canada, https://www150.statcan.gc.ca/n1/daily-quotidien/231121/cg-a001-eng.htm
