Goodbye TINA? The stock market is facing competition from the humble GIC

The current bout of stock market volatility has plenty of causes, including geopolitical uncertainty, soaring inflation and fears of recession.

But the humble GIC can also take some credit here. Rising rates on guaranteed investment certificates may be challenging the bull-market mantra: There is no alternative to stocks.

TINA, the mantra’s popular acronym, made a lot of sense in an environment of ultra-low interest rates. Low rates boosted the valuation of stocks and tarnished the appeal of bonds.

While some investors might have fretted over record highs of major stock benchmarks earlier this year, TINA offered assurances that it was best to stay put.

Now, though, alternatives are emerging.

GICs are among the most compelling options – and have become a popular online search topic as yields rise and investors scramble to learn more about them.

“That indicates to us that Canadian consumers are eager to take advantage of these increasing rates,” Natasha Macmillan, director of everyday banking at Ratehub, said in an interview.

Typically, GICs are for risk-averse investors who might not be able to tolerate dips in the stock market.

“Now, that might be changing,” Ms. Macmillan said.

The reason: Investors can buy GICs with yields that rival stock dividends, but without exposing themselves to market fluctuations.

Some of the Big Six banks, typically stingy next to smaller lenders in terms of their GIC rates, are offering yields of 3.45 per cent for one-year GICs. That’s up substantially from well under 1 per cent just a year ago.

Just to be clear: An investor who buys one of these GICs will get their capital returned after one year, along with 3.45 per cent interest – tax-free if it is held in a registered retirement savings plan or a tax-free savings account.

Longer-term GICs that mature after two to five years offer even higher yields.

The yield on a two-year GIC from a big bank is now 4 per cent and 4.2 per cent for a five-year GIC. Again, smaller lenders offer even more. And for investors who don’t want to lock in their money for a year or more, cashable GICs are an alternative.

Certainly, inflation will claw back from these returns, given it is running very hot right now and pushing central banks to raise interest rates aggressively.

But the payout on a five-year GIC is more than the current dividend yield of about 3.5 per cent for the S&P/TSX Canadian Dividend Aristocrats Index, which tracks a collection of dividend stocks with a history of raising their payouts every year.

And given that the federal government – through the Canada Deposit Insurance Corp. – guarantees the GIC’s combined principal and interest payments up to $100,000, the returns can look attractive when stock market indexes are in decline.

The S&P 500 has fallen 22 per cent from its record high close on Jan. 3.

Even the S&P/TSX Composite Index, relatively sheltered from the current bout of volatility because of its exposure to gold, energy and other commodity producers, has fallen 12 per cent from its record high in early April.

“When investors are worried that equities will drop, cashable GICs or various high interest deposits, while still providing lean yields relative to inflation, can look attractive as a parking place until equities find a floor again,” Avery Shenfeld, chief economist at CIBC World Economics, said in an e-mail.

Even longer-dated bonds could win affection with investors, he added, when they have adjusted to rising interest rates.

So is TINA dead?

Some observers caution that alternatives to stocks are still missing a key feature: Returns, over time, might not measure up to the stock market.

Despite recent volatility, the S&P 500 is up more than 50 per cent over the past five years, not including dividends – handily beating the return on GICs.

Ian Tam, director of investment research at Morningstar, said that GICs are a slam dunk if a 4 per cent annual return is all you need to reach your retirement goals. However, many investors need more, especially when inflation is rising.

“The only way to get more is to stay invested, keep a razor sharp focus on an appropriate asset allocation by regular rebalancing, and finally, don’t try to time the market,” Mr. Tam said in an e-mail.

Still, if you’re worried about market volatility and you’re sitting on some cash, GICs are becoming hard to ignore.

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