“Prediction is very difficult, especially if it’s about the future!”– N. Bohr
In this month’s reflection section, we had some random thoughts. One was our prediction for interest rates. As the quote above indicates, it is difficult to make a worthwhile prediction. If you assume inflation will settle at 2% and people want to be compensated for taking risks you can safely predict interest rates should settle above 2%, say 3%. This is lower than current rates but much higher than in 2019, 2020 or 2021. Other interest rate thoughts include the risk of a government shutdown in the US is not merely the increase in the unemployed but the fact the Federal Reserve will have much less information to make their interest rate decisions. Higher uncertainty is never a good thing.
The prospect that interest rates might be higher for longer than anticipated by analysts led to weakness in the interest sensitive sectors. These sectors contain companies with above average dividends. We continue to think these stocks are attractive long-term investments. I look at the Canadian banks and can get 5% dividend yields. The banks have solid core earnings but negative returns so far this year. Once rates begin to decline, even the US Federal Reserve expects lower rates next year, these stocks will get back in favour and you will have collected a handsome dividend in the interim. We remain focused on stocks for the long-term.
