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Statistics Canada’s recent report on the state of household finances is a bit like a psychologist’s “what does this inkblot look like to you test?” in that it offers different interpretations that support both optimists and pessimists. Overall, household finances are “in good shape,” in the words of TD economist Ksenia Bushmeneva, but remain dependent on low interest rates and rising real estate and equity market values.

BMO economist Shelly Kaushik is clearly concerned about Canadian personal finances in aggregate. She notes that the ratio of household debt to disposable income climbed 5.4 per cent to 172.9 per cent during the second quarter (not seasonally adjusted). This is the biggest increase since at least 1990, when the data were first collected, and it follows six consecutive quarters of improvement.

Ms. Bushmeneva highlighted a 2.5-per-cent quarterly increase in overall debt (seasonally adjusted this time), which is nearly double the pace of the previous two quarters. It will be no surprise to anyone that mortgage debt featured heavily here, rising 3.4 per cent quarter-over-quarter and 10 per cent relative to the second quarter of 2020. Both numbers are also records.

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The good news comes from the other side of the balance sheet: asset prices. Household net worth improved by 3.7 per cent for the quarter and is fully 19 per cent higher than 2020. Importantly, the debt service ratio – the cost of monthly debt payments relative to income – edged lower to 13.3 per cent from 13.5 per cent in the first quarter. “Even though total household debt is up nearly 7 per cent from a year ago,” writes Ms. Bushmeneva, “interest payments are 4.3 per cent lower.”

Canadians, in short, have strapped on a ton of debt but they can afford it as things stand. The relentless housing market rally, combined with stronger equity markets that boost the value of pensions and RRSPs, have created sharp increases in net worth that help balance out the debt loads in accounting terms.

Everything changes, of course, if borrowing costs move sharply higher or asset prices fall, particularly if they occur at the same time. Monthly mortgage payments will stretch household budgets and overall net worth takes a hit as debt remains and asset prices fall.

It’s easy to view household finances as precarious given the growing mountain of total debt, but any changes in rates are likely to be gradual – Bank of Canada Governor Tiff Macklem is acutely aware of every data point mentioned above – and with debt servicing costs down significantly over the past year, there does appear to be some wiggle room before interest rates cause real widespread financial pain for the average Canadian.

The state of Canadian household balance sheets has important implications for investment portfolios. A deterioration in overall financial health does not only affect bank stock earnings growth as demand for loans falls, the consequent decline in consumption crimps profits for all retail-related stocks.

-- Scott Barlow, Globe and Mail market strategist

This is the Globe Investor newsletter, published three times each week. If someone has forwarded this e-mail newsletter to you or you’re reading this on the web, you can sign up for the newsletter and others on our newsletter signup page.

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Stocks to ponder

Seanergy Maritime Holdings (SHIP-Q) The Contra Guys admit this stock is very risky, but they believe a tripling of its share value could be in the near future given that the shipping industry seems to be making a major turnaround. It has long suffered from weak demand and oversupply. But the trillions being spent on government stimulus, along with supply-chain disruptions, have caused daily rates to lease ships to jump dramatically. Accompanying this, boats are staying at sea longer as there are lineups to unload and, while they wait, the meter keeps ticking. Meanwhile, prices for Seanergy’s bread and butter, bulk commodities such as iron ore and coal, have been doing exceedingly well, with the latter at the highest level in a decade. Here’s Benj Gallander and Ben Stadelmann’s investment case.

AutoCanada Inc. (ACQ-T) Year-to-date, the share price of this car-dealership owner has rallied a remarkable 86 per cent. However, over the past four weeks, the share price has plunged 25 per cent, making it the worst performing stock in the S&P/TSX Small Cap Consumer Discretionary Sector Index. For long-term investors, this may be a stock to patiently watch as it continues to slide. Jennifer Dowty takes a look at the investment case as AutoCanada nears oversold territory.

The Rundown

With a slowing economy and sky-high valuations, investors should buckle up for a volatile fall

September is here, the economic recovery is cooling and stock valuations remain at their highest levels since the dot-com bubble in the late 1990s. Investors should prepare themselves for a riskier ride. As David Berman tells us in this market outlook, there are certainly a number of recent indicators suggesting that the recovery is losing some fizz.

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Also see:

Equity market correction of 5%-10% likely by year end: Deutsche Bank survey

U.S. corporate tax hikes would reduce S&P 500 earnings by 5% in 2022, Goldman Sachs analysts say

Investors eye wobbling energy sector as gauge for Delta fears

Energy stocks are becoming a popular bellwether for concerns over how deeply the Delta variant of the coronavirus is expected to affect the U.S. economy, as the reopening trade that boosted some parts of the market earlier this year continues to stumble. David Randall of Reuters tells us more.

When it comes to mutual fund sales, remember your bank is not your buddy

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The “Know Your Product” rule that will arrive at a bank near you at year-end is supposedly designed to help consumers. The idea is to force advisers to focus on the funds best suited to a client’s needs instead of those that pay the highest commissions. In reality, it will greatly limit investors’ choices. Gordon Pape explains why he’s not the least bit impressed by what the banks are planning to do.

Surge in electric vehicle sales power lithium prices as shortages loom

Lithium prices have jumped to their highest in more than three years thanks to an upsurge in electric vehicle sales, depleting stocks of the battery material in top consumer China. Zandi Shabalala of Reuters reports.

Others

The most oversold and overbought stocks on the TSX

Monday’s analyst upgrades and downgrades

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Monday’s Insider Report: Chairman invests over $336,000 in this depressed dividend stock

Insider bets big on bitcoin mining as shorts get squeezed

Macro hedge funds pray for volatility to justify inflow

Globe Advisor

The Financial Times: Companies rush to exploit fizzing bond markets

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Ask Globe Investor

Question: I am a senior planning to invest in Firm Capital shares yielding approximately 6 per cent for my retirement income. What effect will higher inflation and higher interest rates have on this stock?

Answer: First, I would never suggest investing all your assets in one stock, good as it may appear. I’d put a maximum of 15 per cent to 20 per cent on any security.

Firm Capital Mortgage Investment Corp. is a conservatively managed mortgage lending company, so higher rates mean it can charge higher interest on its loans.

Firm Capital is doing very well during this period of above-average inflation and gradually rising interest rates. The shares were trading below $13 at the start of 2021 and are now over $15. That’s near the stock’s all-time high so I would phase in your purchases over several months and take advantage of any pullbacks.

Also, remember this is a small company with an average daily volume of less than 25,000, so place limit orders.

--Gordon Pape

What’s up in the days ahead

What have been the best-performing Canadian stocks over the past three years? We’ll report on a top 30 list from the Toronto Stock Exchange that may just surprise you.

Click here to see the Globe Investor earnings and economic news calendar.

More Globe Investor coverage

For more Globe Investor stories, follow us on Twitter @globeinvestor

You may also be interested in our Market Update or Carrick on Money newsletters. Explore them on our newsletter signup page.

Compiled by Globe Investor Staff

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