MARKetS REPORT – 2022 2nd Quarter

July 10, 2022

Dear friends,

From April 1st to June 30th was, to say the least, an eventful quarter.  Lingering inflation, tightening central bank policy, high oil prices and geopolitical tensions were top of mind for investors during the last quarter, which is basically where we left off at the end of March 2022 as well.

U.S., Canadian and global equities swung back and forth on market volatility, one moment turning bullish on employment news and company earnings reports, and the next turning bearish on interest rate and inflation worries.  Finally the equity markets ended the 2nd Quarter in a lower position.  Equities were dragged down by uncertainty surrounding inflation, the ongoing pace and size of interest rate hikes and the ongoing Russia-Ukraine conflict. In bond markets, U.S. and Canadian yields, which move in the opposite direction to bond prices, continued to rise throughout Q2 on forecasts for slower economic growth, but dipped at the end of June.

There were a number of positive North American economic indicators during the quarter. The unemployment rate in the U.S. and Canada remained low and job vacancies grew. Both U.S. and Canadian retail sales chugged along while Canadian house prices continued to cool.

More evidence the worst of the pandemic is now hopefully behind us was seen in the U.S. temporarily dropping its mask rules for travellers with several major airlines announcing masking was now optional.   The Canadian federal government opted to keep its masking rules but finally started to relax other COVID-19 travel restrictions. It suspended random testing at airports and mandatory vaccination for domestic and outbound international trips. 

The Canadian federal government also released its 2022 annual budget which included increased military spending, home affordability measures, green initiatives and a tax hike on large banks and insurers. Ontario, which represents 40% of Canada’s economy (based on Gross Domestic Production), headed to the polls for its provincial election with Premier Doug Ford’s progressive conservatives re-elected for a second term with a second majority.  Alberta, Canada’s oil-producing province, which also has the world’s third largest oil reserves, recorded its first budget surplus in seven years following the surge in energy prices since the turn of the year.

Internationally, the G7 conference was held in Germany, where the finance ministers agreed to work closely to tame inflation, monitor markets and exchange rates as well as calling for more extensive crypto regulations. Pro-European Union centrist Emmanuel Macron won a second term as French president, the first French leader to be re-elected in 20 years, which was welcomed by European markets. In the U.K., the Bank of England hiked rates for the fifth time since December 2021, after U.K. inflation rose to 9.1% in May (based on year over year comparisons), the highest in the G7.  The U.K. Prime Minister Boris Johnson has been embroiled in controversy and has since resigned (although he stays until a new party leader is elected by the U.K. Conservative Party).

Despite some indications in the middle of the quarter that U.S. inflation was moderating, it disappointingly increased again, to 8.6% in May (based on year over year comparisons), with energy, food and housing costs the main contributors. To combat inflation, the Federal Reserve Board of the United States implemented two large rate hikes during Q2, 0.50% interest rate increase in May and a jumbo 0.75% interest rate boost in June, its biggest increase since 1994. Fed chair Powell said the Fed is determined to “keep pushing” until inflation comes down. Powell also confirmed the Fed had begun shrinking its asset portfolio of bond holdings.

In Canada, inflation kept climbing as well, to 7.7% in May (based on year over year comparisons), the highest since 1983, driven predominantly by food and gasoline prices. According to Statistics Canada, inflation would have fallen if gasoline was excluded from calculations. Anyone who rides an e-scooter or a bike to work would be happy about that statistic, the rest of us not so much.  The Bank of Canada raised rates 50 basis points twice during Q2, to 1% in April and 1.5% in June, plus signalled rates will need to rise further to return inflation to its 1-3% target range.

Capital Markets in Q2

The S&P/TSX Composite Index ended the quarter down 13.2% while the S&P 500 Index (CAD) posted a loss of 13.4% and the MSCI EAFE Index (CAD) a loss of 11.5%.

Concerns about inflation, high oil prices, tightening central bank policy and the ongoing Russia-Ukraine conflict weighed on U.S., Canadian and global equities during Q2. There was a mid-quarter rebound with the S&P500 Index in particular notching its best results since November 2020, but it wasn’t sustained.

Tech stocks and cryptos pulled U.S. markets down, which spilled over globally. Despite record earnings, Tesla shares slid after CEO Elon Musk’s push to take over the company Twitter.  Most if not all of the big tech names sold-off after disappointing quarterly results while cryptocurrencies and crypto stocks fell dramatically as speculative investors exited the sector. The energy-rich TSX Composite Index fared a bit better due to high oil prices. A raft of big Canadian banks and insurers also posted strong earnings and increased dividends.

In bond markets, U.S. treasury yields and Canadian yields, continued to rise, before dipping slightly at the end of Q2, possibly indicating the current market pullback captures most of the pain and downside.  The 10-year Canadian Government Bond ended Q2 at 3.223% yield and the 10-year U.S. Government Bond ended Q2 at 2.8803% yield.  Like a teeter-totter, as bond yields increase, bond prices decrease.  The FTSE Canada Universal Bond Index has decreased by 12.23% this year and the BBG Global Aggregate Bond Index is down 11.85% this year.  The yield curve, which is the difference between 10 year and 2 year U.S. treasury yields, remained flat, highlighting tighter Fed rate policy at the short end and forecasts for slower growth at the longer end. 

Oil prices continued to be a “thorn in the side” of inflation, topping US$122 a barrel in early June. This was driven by sanctions on Russian imports, signs China’s economy was recovering from the pandemic and U.S. government data showing a drop in its oil stockpiles. Reflecting sky-rocketing oil and waning tech stocks, Saudi oil giant Aramco eclipsed Apple as the world’s most valuable company.

There was some good news at the tail end of Q2. Following a slip in June, oil posted its first monthly decline since November last year, although it’s still hovering just above US$105 a barrel and up about 47% so far in 2022. As result, the loonie, considered a petro dollar, weakened slightly against the greenback, closing at $0.7762 CAD/USD.

What we can expect now?

This year has been a bumpy ride as we’ve experienced a market correction with valuations repriced for higher interest rates. Economic fundamentals including consumer demand, wage growth, job vacancies and corporate earnings remain healthy. While extreme swings are stressful, the worst is likely behind us.  A clearer indication will be apparent once we achieve a few months of declining inflation. It might take time, but a rebound will occur and history has proven investors are rewarded over the long-term.

Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term goals. This strategy helps you keep your emotions out of investing, typically buying high and selling low like many unseasoned investors do. Ongoing monitoring and reviewing of your portfolio also ensures it remains on track. Diversifying investments reduces risk as well.  The best pension plans in the world not only just rely on publicly traded equities and bonds, but on alternative investments including private income, private equities, commodities, real estate and infrastructure to moderate volatility and provide steady returns.  We should be looking at these alternatives for you if you are finding the current public markets too stressful. 

In Closing

Once again, thank you for your continued trust in me and my team for the opportunity to assist you in working toward your financial goals.  

Should you have any questions regarding your portfolio, or wish to set up a meeting either in person, by phone or online by Zoom, please do not hesitate to contact my office at 519-432-6744.   My assistant Susan can be reached at extension 239 and I can be reached at extension 238.

Until we speak again, I hope you have a safe and happy summer.

All the best,

Mark McConnell, BA (Econ.) DipBIS

Senior Investment Advisor, Branch Manager

 Mandeville Private Client Inc. is a member of the Investment Industry Regulatory Organization of Canada and a member of the Canadian Investor Protection Fund.

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This publication contains the opinion of the writer.  The information contained herein was obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made by the writer, Mandeville or any other person as to its accuracy, completeness or correctness.  The information in this letter is derived from various sources, including CI Global Asset Management, Statistics Canada, Bank of Canada, US Treasury Dept, Bloomberg, Reuters, National Post, Investment Executive, Advisor.ca, Wall Street Journal, Daily Mail, Toronto Sun, TNC News, The Post Millennial, MSN.com, CNN, Coindesk.com and The Guardian as at various dates. This material is provided for general information and is subject to change without notice. Every effort has been made to compile this material from reliable sources and reasonable steps have been taken to ensure their accuracy. Market conditions may change which may impact the information contained in this document. Before acting on any of the above, please contact me for individual financial advice based on your personal circumstances.