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Wishful Thinking Drove January Rally

Upon reflection, it appears that the January rally can be attributed in large part to a collective sense of wishful thinking, says Beutel Goodman’s fixed income team. That is somewhat understandable after a difficult 2022 for investors when both stocks and bonds were down significantly for the year. However, markets can be dictated by sentiment and the reality of negative earnings guidance will likely dampen the outlook for corporate bonds for even the most bullish of investors. Central bank policy is another powerful force, although the team believes the U.S. Fed and the BoC (Bank of Canada) are highly unlikely to move as aggressively in 2023 as they did last year. However, further hikes are certainly a possibility if inflation continues to remain stubbornly high. Still, progress is being made on that front and the January year-over-year CPI reading in Canada moved down to 5.9 per cent (4.9 per cent for core), compared to 6.3 per cent in December. The readings are down markedly since the peaks of last summer, but are still a long way off the two per cent target of the Fed and BoC which means rates are likely to remain higher for longer. It also means fixed income should continue to provide attractive yields for investors. The rally of January wasn’t just a stock story, as corporate bonds also saw a significant influx during the month, led by mutual funds keen to reduce the risk profile of their portfolios while still generating a healthy income stream. From January 1 to February 19, US$19 billion flowed into funds that buy global investment grade corporate debt, which is the most ever at that point in the year.

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