MARKetS REPORT - 2022 4th Quarter
Dear Client,
Investors experienced a turbulent ride in 2022. Inflation, central bank rate hikes, oil prices, supply chain disruptions and the Russia-Ukraine war cast a long shadow on markets, causing extreme volatility and dominating financial headlines 24/7. As stressful as this has been, the worst is now likely behind us.
Equities and bonds
U.S., Canadian and global equities swung back and forth in 2022, one moment bullish and the next bearish. For example, in the 3rd quarter of 2022 (from July 1st to September 30th) the three leading U.S. indexes - the S&P500 Index, Dow Jones and Nasdaq - notched their biggest monthly gains since 2020. Equity markets also posted back-to-back monthly gains in October and November with North American stocks up over 10%. Unfortunately none of the rallies were sustained and Canadian, U.S. and global equities markets dropped in December. For the full year 2022, the TSX Composite Index was down 8.7%, the S&P500 Index was down 19.4% and the MSCI EAFE Index finished down approximately 17% (as expressed in local currencies).
Some widely held big tech names (Apple, Microsoft, Meta, AMD, Nvidia, Adobe) sold-off this year after less spectacular earnings results compared to 2021, while crypto-currencies fell dramatically as speculative investors exited the sector. U.S. and Canadian banks had mixed results, in anticipation of higher interest rates and falling mortgage demand. The biggest winning sectors in 2022 were Energy, Aerospace & Defense, and Pharmaceuticals. Overall though, corporate earnings across a wide range of sectors remained resilient with consumer demand holding up.
In bond markets, U.S. and Canadian yields (which move in the opposite direction to bond prices) rose during the first nine months of the year, before dipping slightly in the 4th quarter of 2022 (from October 1st to December 31st). Yields increased on expectations of more rate hikes by the U.S. Federal Reserve Board and the Bank of Canada, the inflationary outlook being sticky for the time being (although inflation has come down a little since its peak this summer). The result of higher borrowing costs in the future leads to forecasts for slower economic growth. Yields then dipped on better inflation news in the second half of 2022 as well as on indications the market pullback now captures most of the re-pricing and downside. The yield curve, which is the difference between 10 year and 2 year U.S. yields, also flattened through 2022 as short and long yields converged. This indicates Fed rate hiking at the short end (so the likelihood of more rate hikes for the next few months) and forecasts for slower growth at the longer end.
Economic indicators, currencies and oil
Despite the market swings and uncertainty, there were a number of positive North American economic indicators reflecting the U.S. and Canadian economies continue to be in relatively good shape. The unemployment rate in the U.S. and Canada remained low and job vacancies grew. Retail sales and consumer spending chugged along nicely while house prices on both sides of the border cooled. As we headed into the second half of 2022, the CEOs of two major grocery chains both stated that food prices had started stabilizing and a CEO of a large shipping company said supply chains are back to normal.
In foreign exchange markets, the Canadian loonie, dubbed a “petro-dollar” due to its close ties with the oil sector, both strengthened and weakened in tandem with ups and downs in oil prices. For the year, the loonie weakened against the US dollar but not as much as other major currencies. The Canadian dollar remains the best performing G10 currency relative to the US dollar, which has been seen as a buffer against rising interest rates. The U.S. dollar marked its best year since 2015.
The price of oil fluctuated through 2022. It surged in the first half of the year, peaking at US$122 a barrel (for West Texas Intermediate or WTI crude oil) by early June. Contributing factors were supply chain disruptions, Russia’s invasion of Ukraine, and an OPEC production cut (so supply down) coupled with strong U.S. GDP growth and signs that China’s economy was recovering from the pandemic (so demand up). From the beginning of July, oil prices started to decline and ended 2022 hovering near US$80 a barrel (for WTI crude). This resulted in an overall increase of about 7% compared to 2021. The decline in the price of oil since July was driven by anticipation of the Fed’s (and every other central bank’s) rate hiking plans, a strengthening US dollar and slowing global economic growth, that will likely result in lower oil demand.
Inflation, interest rates and central banks
U.S. inflation peaked at 9.1% during the summer, a 40-year high. Supply chain disruptions and rising energy, food and housing costs were the main contributors. Inflation then started to ease in the second half of 2022, cooling to 7.1% by year-end. This was driven by falling prices in housing, healthcare and the used car sector, as well as less expensive gasoline, electricity and air travel. The Fed raised rates from near zero to 0.25%, in March, its first increase in three years and then went on to make seven large hikes, including four straight 0.75% increases, its biggest since 1994. At its annual Jackson Hole summit in Wyoming, U.S. Federal Reserve chairman Jerome Powell said the Fed would continue hiking until inflation is back within its 2% target range.
In Canada, inflation headed north as well, hitting 7.7%, in the 2nd quarter of 2022, its highest level since 1983, before cooling in the second half of 2022 and ending the year at 6.4%. The Bank of Canada also raised rates seven times, including a full one percentage point hike in the summer. Bank of Canada governor Tiff Macklem noted that it will take time for higher rates to bring inflation under control, but monetary policy is starting to have an effect.
Many other central banks around the world coordinated with the Fed, including the Bank of England and European Central Bank. Most notably, the Bank of Japan ended its long-term (over 25 year) near-zero interest rate policy. China’s central bank was an outlier, introducing a 0.1% rate cut to stimulate growth.
What can we expect next?
As difficult as 2022 has been with rate hikes, high inflation and market swings, the worst is now probably behind us and the conditions created for a much more compelling investing environment going forward. Central bank policy, which operates with a lag, is likely to weigh on the economy into 2023, but equity valuations have normalized and the potential returns of several asset classes offer very attractive opportunities. Corporate earnings in general have remained resilient and supply chains are finally moving again.
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 investors do. I strongly believe that the #1 threat to your investment portfolio is unbridled emotion. More money is lost due to fear and greed than all of the financial, economic and geopolitical events combined. It’s not the events themselves but our response to the events that can cause the greatest harm.
2022 RRSP deadline and new 2023 TFSA room
March 1, 2023 is the deadline for tax-year 2022 RRSP contributions. If you still have available RRSP contribution room, you should be adding to your RRSP or Spousal RRSP right now. The maximum annual RRSP contribution is 18% of prior year earned income to a maximum of $29,210 for 2022. If you missed any contributions in previous years, these can also be added to your RRSP contribution this year, unless you are over the age of 71. The year when you reach age 71 is the last year you can add to your RRSP. But if your spouse is younger than you, you can add $ to a Spousal RRSP, up to the year your spouse reaches age 71. The contribution must be made before December 31st if age 71 is a factor, there is no extension for 60 days past year end.
The new year also brings an extra $6,500 you can allocate to your Tax Free Savings Account. The TFSA is now 15 years old (and already thinking about next year's sweet 16 party!!). If you were a Canadian resident and age 18 or older when the TFSA program came into effect in 2009, then you could have invested up to $88,000 in a TFSA. The grid below was written as another way to view TFSA contributions, based on your year of birth. If you are age 32 or older this year, you are the top line. Otherwise, look out below:
I can talk your ears off about the tax-efficient advantages of RRSP and TFSA investing and maximizing your retirement savings. Both RRSPs and TFSAs can hold most types of investments (including stocks, bonds, High Interest Savings funds, mutual funds, ETF's). However, some investments (like US companies paying dividends) should be avoided in your TFSA if possible. That US dividend income would be taxable, since the TFSA is not considered as a “pension plan” to the IRS.
And it should be noted that 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.
And, if things have changed with you personally (a new job, a new address, a new kid, etc.) please call or email me with any changes and we can review your situation.
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 wonderful winter.
All the best,
Mark
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, CI Financial, Globe and Mail, Daily Mail, National Post, Wall Street Journal, Forbes, MSCI, MSN.com, Advisor.ca, cp24.com, Toronto Sun, Bloomberg, Reuters, Investment Executive, US Treasury Dept, TNC News, The Post Millennial, Advisor’s Edge, Coindesk.com, U.S. Energy Information Administration, Marketwatch, Baystreet, CNBC, The Economist, The Guardian, Yahoo News, CTV News, Bank of Canada and Statistics Canada 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 has 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.