Schneider Insurance Update
Stock markets have continued to move considerably higher since our last update on solid quarterly earnings, which have exceeded analyst expectations.
It’s said that markets climb a wall of worry, and that certainly seems to be the case here, as there is no lack of concern when looking at the actual data.
The interest rate hikes over the last year were the fastest on record and surprised many.
The hikes, along with inflation, are steadily eroding middle-class purchasing power, pushing more people towards the fringes. Inflation will continue to rise due to shipping issues in the Red Sea and the Panama Canal, and it’s about to get significantly worse due to shipping delays now coming from the Port of Baltimore.
Yet due to a relatively still buoyant economy and concerns over existing inflation, the Federal Reserve has pushed off rate declines many were expecting to take place in the first quarter.
As a result, what we are now seeing is a slow-motion meltdown of the commercial real estate sector as the effects of higher rates collide with the realities of workers that (since Covid) have decided that there’s no real reason to work in large office towers.
As the Wall Street Journal reports, vacancies are at an all-time high. This is having a follow-on effect in the small to mid-sized banking industry in the U.S. Due to banks’ outsized mortgage holdings against these commercial properties, the sector is expected to see staggering losses over the next few years. Accordingly, we expect this to culminate in a large-scale consolidation of U.S. financial institutions, with many bank failures to come.
Unfortunately, the carnage is unlikely to stop there. As credit continues to tighten globally due to banks needing to preserve cash for loan losses, more and more business clients cannot get or renew financing – irrespective of rates or collateral brought to the table.
Then, there is the prospect of increasing tax hikes across North America in general. Here in Canada, we’ve got a carbon tax hike that should continue driving inflation.
The result may be a hard landing as economic steam gradually peters out in the U.S., as it has around most of the world. Central banks typically react to a recession with significant rate cuts, which your portfolio managers expect will eventually spur both stock and bond prices.
There’s no question that markets are expensive and that we are due for another correction but with inflation looking to remain high for some years to come, maintaining a balanced portfolio has never been more important.
As always, if you’ve got questions or concerns about your holdings, we’re just a phone call or a visit away.
Mark, Sean & Cass
