The Stock Market Is Showing Eerie Parallels to the Last Market Crash

Events today have similarities to the most recent market crash. Royal Bank of Canada (TSX:RY)(NYSE:RY) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are solid investments regardless of market scenarios.

| More on:

Will the Bank of Canada cut interest rates to counter an economic downturn? The reason for this likely move is the inverted yield curve. The phenomenon happens when long-term yields drop lower than short-term yields.

Canada is experiencing its deepest inversion since May 2000. The 10-year yield is 20 basis points below the two-year yield, and therefore it’s highly inverted. With the inverted yield curve flashing, a recession is a strong possibility.

Past recessions  

In the last 50 years, Canada has had five recessions with at least two consecutive quarters of contraction. While an inverted yield curve usually precedes recessions, the collapse of oil prices was the cause of the recession of 2015.

However, it was the inverted yield curve that prompted a recession during the 2008-2009 global financial crisis. Fortunately, Canada doesn’t always fall into recession because of the inverted yield curve.

But if the curve further inverts, the Bank of Canada could act and tighten financial conditions. Banks would not have the incentive to lend, and a global slowdown could hurt commodity exports, including oil.

Safe anchors     

Historically, a recession has followed a shift in the yield curve. Typically, however, yields invert an average of 18 months before a recession commences. Hence, you have time to look for safe harbours for your money.

Ironically, banks affected by low-interest scenarios such as Royal Bank of Canada (TSX:RY)(NYSE:RY) and Toronto-Dominion Bank (TSX:TD)(NYSE:TD) are your docks. The two largest banks in Canada can take it in on the chin and still perform better than industry peers.

RBC, for instance, is showing rising profits amid warnings of inverted yields, stock market volatility, and a low interest rate environment. In the third quarter, the bank posted a record $3.3 billion in profits. Its residential mortgage business even grew by nearly 6%.

TD is doing slightly better than expected. The second-largest lender in Canada posted an 11% growth from its U.S. retail business segment and a 9% growth in its wholesale banking segment, which includes investment banking and capital markets. Its retail income in the home country also rose by 3.4%.

So far, the earnings of both banks remain unaffected by the inverted yield curve. RBC and TD are also increasing credit loss provisions in case there’s a need for write-offs. As a collective group, Canada’s six top banks have raised the total amount of provision for bad loans by 27% as of the quarter ended July 2019.

Investments for tougher times

It’s not unusual for RBC and TD to significantly raise credit provisions when a recession is looming within the next couple of years. Both banks are a step ahead in preparing for a worsening economic outlook if the household debt in Canada reaches record high level.

With RBC and TD having a track record of paying dividends for more than 100 years, the identical 3.9% dividend each bank pays is safe no matter how long the period of instability takes. To survive a recession, all you need is a pair of high-quality investments that provide wealth and stability to the investing public.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned.

More on Dividend Stocks

profit rises over time
Dividend Stocks

Buy 2,990 Shares of This Stock for $165.25/Month in Passive Income

A high-yield dividend stock can transform your investment into monthly passive income streams.

Read more »

close-up photo of investor Warren Buffett
Dividend Stocks

3 Warren Buffett Stocks to Buy Hand Over Fist in November

Warren Buffett has been buying Occidental Petroleum (NYSE:OXY) hand over fist. He previously owned the similar Canadian oil giant Suncor…

Read more »

dividend growth for passive income
Dividend Stocks

Is Intact Financial Stock a Buy for its 1.8% Dividend Yield?

Intact Financial's dividend is not that attractive, but its strong history of execution and dividend growth are compelling factors for…

Read more »

Hourglass and stock price chart
Dividend Stocks

Where Will Brookfield Stock Be in 5 Years?

Based on its recent successes, Brookfield Corp (TSX:BN) looks poised to be more valuable in five years' time than today.

Read more »

hand stacks coins
Dividend Stocks

The Smartest Dividend Stocks to Buy With $400 Right Now

The market is full of dividend stocks to buy. Here's a look at two options that cater to both growth…

Read more »

ways to boost income
Dividend Stocks

This Top TSX Dividend Stock Down 10.78% Is Ready for a Rebound

The rebound of an underperforming but top TSX dividend stock is coming due to a significant product diversification.

Read more »

Canadian Dollars bills
Dividend Stocks

3 Dividend Stocks to Supercharge Your Passive Income

These companies are known for their consistent payout histories and high yields can supercharge your passive-income portfolio.

Read more »

space ship model takes off
Top TSX Stocks

My 5 Favourite Stocks to Buy Right Now

There are plenty of great stocks on the market. Here's a look at my favourite stocks to own for growth…

Read more »