What should ordinary investors do now that the ground seems to be shifting beneath their feet?
Inflation is at historically high levels. Interest rates on consumer debt are rising.
And Europe’s biggest ground war since World War II erupted with Russia’s invasion of Ukraine last week.
The urge in times of apparent trouble is to do something impulsively or to think you should.
Resist the urge.
Yes, the world is a bit crazy now for “disaster investors”.
These are the high-flying speculators trying to profit from the wild swings in commodity prices resulting from geopolitical crises.
Let them get on with it.
But ordinary investors have little reason to reorganize their financial furniture.
Standing tapping is a good plan. Now is the time not to let ominous headlines distract you from maintaining household cash flow and saving for retirement.
The biggest challenge to these goals is inflation.
Expect inflation to get worse before it goes down. Statistics Canada will soon release inflation figures for February which will put price inflation at around 6%, even worse than the 30-year high of 5.1% recorded in January.
But the cavalry arrived.
With its quarter-point hike in its key rate this week to 0.5%, the Bank of Canada launched its long-awaited campaign of rate hikes aimed at bringing inflation down to 2%.
The Bank’s chances of success are good.
The current level of price inflation is abnormal and temporary.
It is a result of the rapid pace of global economic reopening and recovery and the resulting labor shortage and supply chain crisis. A geopolitical crisis in Eastern Europe did not help.
In contrast, the decades preceding the pandemic, dating from the aftermath of the oil shocks of the 1970s, were characterized by moderate inflation.
Meanwhile, however, banks and other consumer lenders raised rates this week along with the Bank of Canada.
They will continue to drive up the cost of borrowing with three or four more rate hikes planned by the Bank of Canada over the next year.
The era of easy money is not quite over, but it is coming to an end.
Which means careful budgeting and paying off mortgage, credit card and other debts have become more important.
Today’s uncertainty also has the potential to disturb ordinary investors’ sleep with money in the stock market.
However, equity markets are traditionally resilient to geopolitical shocks.
“Historically, events such as war, assassinations and terrorist attacks are simply not that significant to the factors driving the markets,” US fund manager Barry Ritholtz wrote this week.
“What drives stock prices is rising corporate revenues and profits, and the typical geopolitical event isn’t big enough to change them much.”
Indeed, the S&P/TSX Composite Index fell 0.5% on the first day of Russia’s invasion of Ukraine.
But in six days, the Toronto Stock Exchange had recouped this loss and posted a gain of 4% compared to the closing level of the day before the attacks.
The current allure of investing in the oil and gas sector is undeniable.
A world oil price that was already in freefall before the start of the Ukraine invasion has jumped another 20% since the start. Canadian oil inventories have increased by about 90% over the past year.
It is worth testing the assumptions behind these high prices.
Which means, in a nutshell, that Canada and other energy exporters will not increase their production to cover a Russian shortfall.
And that Russian oil and gas will all but disappear from the world market, even though Western sanctions have largely exempted it.
And that consumers won’t reduce their oil and gas consumption, easing upward pressure on fuel prices, although Canadians have done so with every energy crisis since the oil shocks of the 1970s.
If you’re looking for security and decent returns, fixed income investments have become more attractive now that interest rates are on the rise.
The same goes for blue-chip stable-income stocks with high dividend payouts, like BCE Inc., the Big Five banks, and food retailers Metro Inc. and Loblaw Cos.
And have homes in Toronto.
The world price of oil has twice crashed by around 80% in the past decade. In contrast, the Toronto real estate market is stable.
In the past decade, the average sale price of Toronto homes has only fallen once, and briefly, by about 10% in 2017.
Goodness knows, a break from the near tripling of the average home sale price in Toronto over the past decade would be a welcome respite from about two years of near-panic buying.
But a pause means prices flatten, not fall sharply, before the long-term trend of rising values reasserts itself.
This is the most likely future for the Toronto real estate market. It gives new meaning to the old phrase ‘safe as houses’.