Bond Market Concerns and Equity Investor Risks

David Driscoll, President and CEO of Liberty International Investment Management, shares his outlook on the markets. It’s important for equity investors to pay attention to the bond markets because equity valuations are based on the present value of future cash flows. When interest rates rise, the discount rate rises and, therefore, those present value cash flows fall. Currently, the bond market is concerned about rising government deficits and inflation on both sides of the border.

On average, professional bond investors are not going out any further than three-year maturities because the risk isn’t worth the reward of owning longer-dated bonds. How does this impact equity investors? I’ll answer that with one question: “Where were you in 2022?” Just two years ago, interest rates rose 4.75 per cent, the highest one-year increase since 1982, and the equity returns ranged from down eight per cent for the TSX (Canada) to down 33 per cent for the Nasdaq (U.S. tech stocks). The Magnificent Seven mega-cap tech names were down an average of 46 per cent. Returns for the S&P 500 are higher than its peers in 2024 because 30 per cent of the index is tech-based and most of the return has come from just 10 companies. That’s a reason to be cautious.Tech stocks are twice as risky as the overall stock market. If you double your money, sell half to ensure you don’t get caught in a downdraft if this current bubble bursts. The current risk to artificial intelligence (AI) is quantum computing which may be 5-10 years away. Quantum computing chips calculate millions of times faster than AI which could end the domination of AI stocks. Only 10 per cent of semi-conductor chips are located in the United States. If China invades Taiwan, where will U.S

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