With interest rates comfortably above 5% and not expected to fall over the next 6 months, market participants are definitely wondering if the stock market is a safe place. Right now it’s all about a reliable yield and risk to reward ratios.
With the long run average of the S&P 500 sitting at approx. 10%, one has to wonder if we’re going to be above or below that figure over the next couple years in stock market. It’s a valid point to ponder because with interest rates above 5%, market participants can lock in to a GIC (Canada) or CD (U.S.) for 1-3 years for a guaranteed 5%+ return. And this all happens with no volatility whatsoever. At the end of your investment term in a GIC or CD, you are due your principal deposit back as well as your guaranteed yearly interest rate over your term.
If market participants feel that over the next few years the S&P 500 will return less than 5% per year, a GIC or CD may be a better investment option. The safety of capital and guaranteed interest rate is certainly alluring for those who want to lock in rates today without worrying about tomorrow. Furthermore, there is a slight possibility that interest rates could move higher in both the U.S. and Canada. In that event, there could be even higher rates available for GICs and CDs at that particular time. It’s this kind of struggle and mental battle that markets are going through right now, you can see below how stock returns have been comparing with bonds as of late.