Portfolio Updates – Page 3 – Frame Global Asset Management

March 2023

Recent data suggest that the economy’s strong start to the year was sustained in February, with consumption growth set to accelerate in the first quarter and payroll employment growth robust, while core inflation remained too high for comfort. But the collapse of Silicon Valley Bank on March 10th has further contributed to our view that this strength won’t last. While the immediate crisis in the banking sector appears to be easing, the aftermath will impact the timing of the recovery.

SVB’s deposit base was drawn heavily from the tech sector, with a high proportion of deposits in excess of the $250 thousand threshold guaranteed by the Federal deposit insurance scheme. The core of SVB Financial’s business was the venture capital ecosystem, taking deposits from, and making loans to venture capital-funded companies. On the other side of its balance sheet, a large proportion of assets were held in longer term fixed income securities rather than loans. Problems in the tech sector led to a withdrawal of deposits, forcing SVB to sell securities. Once these assets were moved from SVB’s banking book to its trading book it was forced to mark them to market, thereby realising losses caused by the aggressive rise in interest rates over the past year. (Higher interest rates means lower bond prices.) These losses led to SVB becoming insolvent. U.S. policymakers were forced to introduce a package of emergency measures over the days immediately following the collapse. These developments will result in tighter credit conditions for households and businesses and weigh on economic activity, hiring, and inflation. In March, we maintained our twelve-month forward outlook for the U.S. economy, reflecting our expectation that the U.S. will fall into recession to the third quarter of 2023. Our outlook remains six months of Stagnation, followed by three months of Recession and then three months of Stagnation.

In February 2023, China’s trade surplus increased to an all-time high of USD 116.88 billion. Exports fell by 6.8% year over year while imports dropped at a faster 10.2% amid a slowdown in the global economy and low domestic demand. The trade surplus with the United States narrowed by 30.9% to USD 41.3 billion.¹ China’s annual inflation rate fell to 1.0% from 2.1% in the prior month,² while surveyed the urban unemployment rate edged up to 5.6% in February.³ The Eurozone economy showed no growth in the final quarter of 2022. Amongst the bloc’s largest economies, GDP grew in the Netherlands, Spain, and France, but contracted in Germany and Italy.⁴ Consumer price inflation in the Euro Area was confirmed at 8.5% year-on-year in February 2023. Amongst the Eurozone’s largest economies, inflation picked up in Germany, France, Spain, and the Netherlands, but slowed in Italy.⁵

In February, the U.S. recorded trade deficits with China, the EU, Mexico, Vietnam, Japan, and Canada, while surpluses were seen with South and Central America, the U.K., Australia, and Hong Kong.⁶ The annual inflation rate in the US slowed to 6%,⁷ while the unemployment rate edged up to 3.6% in February 2023, from a 50-year low of 3.4% in January.⁸ The Canadian economy stalled from the previous quarter in Q4 of 2022, putting an end to five consecutive quarters of growth.⁹ In its March meeting, the central bank paused its rate-hike cycle at 4.5%.¹⁰ The unemployment rate in Canada held steady at 5% in February of 2023.¹¹ The annual inflation rate fell to 5.2%, the lowest since January last year, from 5.9% in January.¹²

Concerns over inflation and its impact on rates returned in February. In a reversal of January’s performance, the S&P 500 finished down 2.4%. Smaller caps performed slightly better, with the S&P SmallCap 600 down 1.2%. Concerns about a Fed-induced recession and the health of the U.S. banking sector sparked demand for safe-haven assets, mainly government debt. Canadian equities finished the month with downward momentum. The S&P/TSX Composite fell 2.5% in February. The S&P Europe 350 extended its year-to-date gains in February, with the pan-European bellwether ending 1.7% higher for the month. The U.K. market was the brightest spot, contributing +0.6%, followed by France and Denmark, with 0.4% and 0.2% in turn. The S&P Pan Asia BMI gave up most of January’s gains as it plunged 5.3% in February.

In March, we maintained our asset allocation, including the twenty percent cash position across all models. 2022 provided an example of how diverse sources of demand and supply can provide gold with its uniquely stable portfolio-additive performance as gold produced a marginal gain in 2022.

While SVB was a failure of risk management, it was also a failure of regulation and supervision. Too big to fail became “too small to see” as Dodd Frank regulations on mid-sized banks—including stress testing—were rolled back by Congress and the Fed after 2018. As this has demonstrated, the current economic recovery is unstable, as the synchronized global pressures of demand contraction, supply shock, and weakening expectations prevail. We are currently positioned for a recession in the U.S. in the third quarter. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹Trading Economics. China Trade. March 7, 2023.

²Trading Economics. China Inflation. March 9, 2023.

³Trading Economics. China Unemployment. March 15, 2023.

⁴Trading Economics. EU GDP. March 8, 2023.

⁵Trading Economics. EU Inflation. March 17, 2023.

⁶Trading Economics. U.S. Trade. March 8, 2023.

⁷Trading Economics. U.S. Inflation. March 10, 2023.

⁸Trading Economics. U.S. Unemployment. March 10, 2023.

⁹Trading Economics. Canada GDP. February 28, 2023.

¹⁰Trading Economics. Canada Interest Rates. March 8, 2023.

¹¹Trading Economics. Canada Unemployment. March 10, 2023.

¹²Trading Economics. Canada Inflation. March 20, 2023.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. February 28, 2023. Index performance is based on total returns and expressed in the local currency of the index.

March 26, 2023/by Drew Millard

February 2023

Current widespread growth increases the risks that a recession will take longer to materialize, require higher policy rates, and be deeper than was expected. Global downturns are amplified when synchronized. Central banks are approaching the final stage of their tightening cycles. It will take time to ascertain the magnitude of the inflation unwind. While there are signs that global economies are recovering, (healthy balance sheets, modest investment cycles, and businesses that are reticent to shed hard-to-find labor), the lagged effect of central bank tightening across economies risks a more synchronized and deeper downturn.

After volatility in 2022 and mixed earnings results, January was a positive start to the new year, characterized by stronger GDP growth, a slowing pace of inflation, and expectations of reduced rate hikes by the Fed. With this considered, we believe that the economy will not fall into recession in the first quarter. In February, we revised our twelve-month forward outlook for the U.S. economy, pushing out the anticipated recession to the third quarter of 2023. The new Outlook is for six months of Stagnation, followed by three months of Recession and then three months of Stagnation.

The Chinese economy expanded by 3.0% in 2022, the second slowest pace since 1976 amid the impact of Beijing’s zero-COVID policy.¹ China’s annual inflation rate rose to 2.1% in January from 1.8% in December.² Eurozone quarterly economic growth came in at 0.1% in the fourth quarter, down from a 0.3% in the previous three-month period. Amongst the bloc’s largest economies, GDP grew in the Netherlands, Spain, and France, but contracted in Germany and Italy.³ The Euro Area recorded a trade deficit of EUR 8.8 billion in December of 2022, little changed from the previous year.⁴ The Consumer Price Index in the Euro Area decreased 0.4% month-over-month in January of 2023.⁵ The U.S. economy expanded an annualized 2.9% on quarter in Q4 2022, following a 3.2% jump in Q3.⁶ The annual inflation rate slowed only slightly to 6.4% in January from 6.5% in December.⁷ The unemployment rate inched lower to 3.4% in January, the lowest level since May 1969.⁸ Canada posted a trade deficit in December 2022, mainly driven by strength in prices. It marks the second consecutive year of trade surplus, following annual deficits from 2015 to 2020.⁹ Canadian headline inflation fell to 5.9%,in January from 6.3% in December. The downside surprise occurred despite a much larger 1.1% m/m rise in food prices.¹⁰ The unemployment rate in Canada held steady at 5% in January.¹¹

In January, the S&P 500 was up 6.3%, posting its best January performance since 2019. Smaller caps performed better, with the S&P Mid Cap 400 and S&P Small Cap 600 up 9.2% and 9.5%, respectively. Yields declined amid the market’s expectation of a slowing pace of Fed rate hikes. The Canadian S&P/TSX Composite rose 7.4% in January. International equities outperformed the U.S., boosted by a weakening U.S. dollar and China’s reopening. The S&P Europe 350 had its best start to the year since 2015, up 6.9% in January. Mid and small caps did better, with the S&P Europe Mid Cap and the S&P Europe Small Cap up 9.3% and 8.5%, respectively. Thirteen of sixteen countries contributed positively to pan-European equity returns in January. The French market was the best, contributing +1.60%, followed by Germany and the U.K., with 1.27% and 1.10% in turn. The S&P Pan Asia BMI had its best start to the year since 2012, up 7.3% in January.

In February, our optimization process identified portfolio solutions for our Model Risk Thresholds, with the exception of the Conservative Model. With this guidance, we maintained our asset allocation, including the twenty percent cash position across all models. 2022 provided an example of how diverse sources of demand and supply can provide gold with its uniquely stable portfolio-additive performance as gold produced a marginal gain in 2022.

The current economic recovery is unstable, as the synchronized global pressures of demand contraction, supply shock, and weakening expectations prevails. We are currently positioned for a recession in the U.S. in the third quarter. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹Trading Economics. China GDP. February 10, 2023.

²Trading Economics. China Inflation. February 10, 2023.

³Trading Economics. Eurozone GDP. February 14, 2023.

⁴Trading Economics. Eurozone Trade. February 15, 2023.

⁵Trading Economics. Eurozone Inflation. February 1, 2023.

⁶Trading Economics. U.S. GDP. January 26, 2023.

⁷Trading Economics. U.S. Inflation. February 14, 2023.

⁸Trading Economics. U.S. Unemployment. February 3, 2023.

⁹Trading Economics. Canada Trade. February 7, 2023.

¹⁰Trading Economics. Canada Inflation. February 21, 2023.

¹¹Trading Economics. Canada Unemployment. February 10, 2023.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. January 31, 2023. Index performance is based on total returns and expressed in the local currency of the index.

February 26, 2023/by Drew Millard

2023 Portfolio Updates

January 2023

2022 was a year characterized by geopolitical tensions, rate hikes, and inflation concerns across regions, with significant losses across asset classes. Oil prices surged in March as the Russia-Ukraine conflict disrupted global oil trade flows, but prices reversed in the second half of the year as recession risks multiplied. The seeds for a 2023 recession were sown with the Fed’s rate hikes that have begun to permeate the economy. The 2023 global growth forecast factors in that the effects of policy tightening are yet to be felt. Recessions in major economies are expected in the first half of 2023 as reductions in corporate earnings in the first quarter continue to lag inflation. In January, we revised our twelve-month forward outlook for the U.S. economy of six months of Recession followed by six months of Stagnation to three months of Recession followed by nine months of Stagnation.

China reversed its policy on zero-COVID, brightening the prospects for the world’s largest economy in 2023. The Chinese economy expanded 2.9% year over year in Q4 of 2022, following 3.9% growth in Q3. For the full year of 2022, the economy grew by 3.0%.¹ China’s annual inflation rate rose to 1.8% in December from November’s eight-month low of 1.6%.² China’s surveyed urban unemployment rate declined to 5.5% in December 2022 from November’s six-month high of 5.7%.³ China’s trade surplus dropped as exports plunged 9.9%, the largest decline in nearly three years, while imports fell at a softer 7.5%.⁴ The economic outlook in the Euro Area worsened, amid lower growth and higher inflation. Imports climbed by 20.2% while exports rose at a softer 17.2%. The trade deficit widened sharply with Russia and China.⁵

The U.S. economy expanded an annualized 2.9% in Q4 2022, following a 3.2% jump in Q3, rebounding from two straight quarters of contraction.⁶ The U.S. trade deficit narrowed to $61.5 billion in November of 2022, the lowest since September of 2020.⁷ The annual inflation rate in the U.S. slowed for a sixth straight month to 6.5% in December of 2022,⁸ while the unemployment rate in the U.S. dropped to 3.5%, matching the rates seen in September and July.⁹ Canada posted their first trade deficit in 11 months in November of 2022, as exports fell by 2.3%. The sharp decrease in energy prices during the period deflated the sum of foreign energy sales. Imports fell by 2.1%.¹⁰ The unemployment rate in Canada was at 5% in December of 2022, the lowest since the record low of 4.9% in June and July.¹¹

The S&P 500 turned in an annual decline of 18.1%, the worst since 2008. Smaller caps performed relatively better, with the S&P Mid Cap 400 and S&P Small Cap 600 down 13.1% and 16.1%, respectively. Energy gained 65.7%. Dividend and low volatility strategies offered relatively safe harbors. As yields rose on the back of inflation concerns, bonds declined across the board, with heavy losses among Treasuries and corporates. The S&P/TSX Composite fell 5.8% for the year, while Energy was up 30.3%. The S&P Europe 350 shed 3.5% in the final month to finish 2022 with a -8.6% total return. Mid and small caps did worse, with the S&P Europe Mid Cap and the S&P Europe Small Cap plunging 18.3% and 19%, respectively. The heavyweight U.K. market was the brightest spot, contributing 0.33%, while Germany was a major drag, subtracting 2.1% from the S&P Europe 350. Much of the positive return of Gold Billion in December is attributed to a weaker US dollar as other factors such as futures positioning, and rates largely netted each other out. The US dollar index (DXY) fell below its 200-day moving average in the month, for the first time since June 2021. Gold prices posted a small gain in a year when real yields (10-year TIPs) rose an unprecedented 250 basis points and the dollar gained over 8%. Central banks have been buying gold at their fastest pace since the late 1960s in 2022, according to the World Gold Council. It is assumed that China and Russia are major buyers, but there are no official numbers, as not all government agencies disclose their gold holdings.

In January, our optimization process was unable to identify portfolio solutions for any of our Model Risk Thresholds. With this guidance, we maintained our asset allocation, including the twenty percent cash position across all models. 2022 provided an example of how diverse sources of demand and supply can provide gold with its uniquely stable portfolio-additive performance as gold produced a marginal gain in 2022.

The continuing rise in interest rates will produce a wave of debt defaults. Economic and geopolitical catalysts for volatility are in place that are expected to produce both short and long-term market volatility and risk throughout the highly levered global financial system. This foundation of economic recovery is unstable, as the global situation remains complicated and as the domestic pressure of demand contraction, supply shock, and weakening expectations prevails. We are currently positioned for a recession in the U.S. in the first quarter. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹Trading Economics. China GDP. January 17, 2023.

²Trading Economics. China Inflation. January 12, 2023.

³Trading Economics. China Unemployment. January 17, 2023.

⁴Trading Economics. China Trade. January 13, 2023.

⁵Trading Economics. Eurozone Trade. January 16, 2023.

⁶Trading Economics. U.S. GDP. January 26, 2023.

⁷Trading Economics. U.S. Trade. January 5, 2023.

⁸Trading Economics. U.S. Inflation. January 12, 2023.

⁹Trading Economics. U.S. Unemployment. January 6, 2023.

¹⁰Trading Economics. Canada Trade. January 5, 2023.

¹¹Trading Economics. Canada Unemployment. January 17, 2023.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. December 31, 2022. Index performance is based on total returns and expressed in the local currency of the index.

January 26, 2023/by Drew Millard

2022 Portfolio Updates, Portfolio Updates

December 2022

The global economy continues to slow as we near the end of 2022. The last time that the world experienced a central bank confluence of growth-restricting policies was in 1982, when a global recession was induced. There is good reason to expect the same in 2023. The weak points include China with Covid policies that hurt their economy, and Europe, hindered by slowing global trade and the impact of the Russian war on Ukraine. The U.S. economy is more insulated and is relatively stronger than the other major economies. In December, we maintained our twelve-month forward outlook for the U.S. economy of six months of Recession followed by six months of Stagnation.

The Chinese economy advanced 3.9% year over year in Q3.¹ China’s annual inflation fell to 1.6% in November, from 2.1% in the prior month.² China’s surveyed urban unemployment rate increased to a six-month high of 5.7% in November, amid ongoing COVID-19 restrictions.³ Exports from China plunged 8.7% year over year in November.⁴ The Euro Area economy expanded 2.3% year-on-year in the third quarter. Among the bloc’s biggest economies, Germany expanded 1.3%, France 1%, Italy 2.6%, and Spain 3.8%.⁵ Consumer price inflation in the Euro Area was revised to 10.1% year-on-year in November. Energy prices rose 34.9%, the largest contributor.⁶ The unemployment rate in the Euro Area fell to a record low of 6.5% in October, falling in Spain and Italy while remaining steady in France and Germany.⁷

The U.S. economy grew an annualized 2.9% in Q3 2022. The biggest positive contribution came from net trade, as imports sank while exports rose.⁸ The annual inflation rate in the U.S. slowed for a fifth straight month to 7.1% in November.⁹ The Canadian economy expanded 0.7% in Q3 2022, a fifth consecutive quarter of growth.¹⁰ Canada posted a trade surplus as exports rose by 1.5%, with growth observed in 8 out of 11 industries.¹¹ Canada’s annual inflation rate was 6.9% in October, as continued interest rate hikes by the Bank of Canada lifted mortgage costs by 11.4% annually, the highest since February 1991.¹² The unemployment rate in Canada was at 5.1% in November.¹³

A rally on the last trading day of November capped off a month of relief for the market in the form of easing inflation and optimism surrounding a potential slowing pace of U.S. rate hikes. The S&P 500 posted its second consecutive month of gains, with a total return of 5.6%. The S&P Mid Cap 400 and S&P Small Cap 600 were up 6.1% and 4.2%, respectively. With Treasury yields declining as a result of slowing inflation, U.S. fixed income index performances were positive across the board. Canadian equities continued to rise in November. The S&P/TSX Composite increased by 5.5%. The S&P Europe 350 turned in a 7.1% gain, with all its constituent countries ending the month in positive territory. The U.K. and France were the biggest contributors to the benchmark’s gains with contributions of 1.7% and 1.3%, respectively. The S&P Pan Asia BMI surged 13.6% in November with China contributing most to the gains.

In December, our optimization process was unable to identify portfolio solutions for any of our Model Risk Thresholds. With this guidance, we maintained our asset allocation, including the twenty percent cash position across all models.

Price growth has likely reached a point where it is destructive to volume growth The Fed aims to attain monetary policy that is sufficiently restrictive to return inflation to 2%. Rate hikes by central banks take an estimated 6-12 months to impact the economy. Companies currently face a worsening macro picture and risks to corporate profit margins due to ongoing higher costs and less ability from consumers to digest price increases. Energy prices will be one on the greatest challenges. Russian supply cuts in February to Western countries that have imposed a price cap on them will cause the energy market to flare up again in 2023. We are currently positioned for a recession in the U.S. in the next two quarters. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹Trading Economics. China Trade. October 24, 2022.

²Trading Economics. China Inflation. December 9, 2022.

³Trading Economics. China Unemployment Rate. December 15, 2022.

⁴Trading Economics. China Trade. December 15, 2022.

⁵Trading Economics. Europe GDP Growth. December 7, 2022.

⁶Trading Economics. Europe Inflation. December 16, 2022.

⁷Trading Economics. Europe Unemployment Rate. November 30, 2022.

⁸Trading Economics. U.S. GDP Growth. December 1, 2022.

⁹Trading Economics. U.S. Inflation. December 13, 2022.

¹⁰Trading Economics. Canadian GDP Growth. November 29, 2022.

¹¹Trading Economics. Canada Trade. December 6, 2022.

¹²Trading Economics. Canada Inflation. November 16, 2022.

¹³Trading Economics. Canada Unemployment. December 2, 2022.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. November 30, 2022. Index performance is based on total returns and expressed in the local currency of the index.

December 26, 2022/by Drew Millard

2022 Portfolio Updates, Portfolio Updates

November 2022

The global expansion has downshifted to a slower pace but remains resilient. We remain in the most aggressive and synchronized monetary tightening cycle in 40 years. Underlying inflation persists at multiple %age points above targets and central banks remain in tightening mode. In response to the U.S. CPI update for October, the 10-year-2-year yield spread inversion is now the most severe since the early 1980s. Minutes from the Fed’s November policy meeting suggest that although most officials were in favour of slowing the pace of rate hikes at upcoming meetings, there was no consensus on how high the peak in rates would ultimately need to be, or how long the restrictive stance would be maintained for. In November we maintained our twelve-month forward outlook for the U.S. economy of six months of Recession followed by six months of Stagnation.

Exports from China edged 0.3% lower year over year in October 2022. This was the first decline in shipments since May 2020, amid poor overseas demand, as cost pressures grew globally and supply disruptions lingered.¹ China’s annual inflation dropped to 2.1% year over year in October 2022, due to a slowdown in cost of both food and non-food.² The Eurozone economy expanded 2.1% year-on-year in the three months to September of 2022.³ Consumer price inflation was revised slightly down to 10.6% year-on-year in October 2022.⁴ The unemployment rate in the Euro Area fell to a record low of 6.6% in September of 2022. It compares with a much higher jobless rate of 7.3% in the corresponding period of 2021, as ample stimulus and growth-oriented policy supported the labor market’s recovery from the pandemic. Among the largest economies, the unemployment rate fell in France (7.1%) and remained steady in Germany (at 3%) and Italy (at 7.9%).⁵

The U.S. economy grew an annualized 2.6% on quarter in Q3 2022, rebounding from a contraction in the first half of the year. The biggest positive contribution came from net trade. Imports sank 6.9% while exports were up 14.4%, led by petroleum products, nonautomotive capital goods, and financial services.⁶ The annual inflation rate in the U.S. slowed to 7.7% in October.⁷ The unemployment rate in the U.S. increased to 3.7% in October 2022. While there were some conflicting signals coming from the October jobs report, the main message is one of continued strength in labor demand. The trend in productivity has been weak, as the recent strength in the labor market has not been matched by strength in output.⁸ The FOMC hiked rates 75 basis points at the November meeting with the target range now at 3.75%-4.0%. It marks a sixth consecutive rate hike and the fourth straight three-quarter point increase, pushing borrowing costs to a new high since 2008. Ongoing increases in the target range will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments, when deciding on the size of further increases.⁹ Canada’s annual inflation rate was at 6.9% in October of 2022.¹⁰ The unemployment rate in Canada was at 5.2% in October of 2022, signaling that the Canadian labor market remains tight.¹¹ Canada’s trade surplus rose to CAD 1.1 billion in September of 2022.¹²

Expectations for a slowing pace of U.S. rate hikes helped the S&P 500 to its best month since July, with a total return of 8.1%, while the S&P Mid Cap 400 and S&P SmallCap 600 were up 10.5% and 12.4%, respectively. Canadian equities rebounded in October. The S&P/TSX Composite rose by 5.6%. The S&P Europe 350 clocked up a 6.2% gain in October, with all its constituent countries ending the month up. France and the U.K. were the biggest contributors to the pan-European benchmark’s gains. The S&P Pan Asia BMI shed 1.5% in October. While 9 out of its 14 regional components gained, China’s negative 2.7% contribution offset those gains.

In November, our optimization process was unable to identify portfolio solutions for any of our Model Risk Thresholds. With this guidance, we maintained our asset allocation, including the twenty percent cash position across all models.

The Fed aims to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2%. With inflation elevated to forty-year highs, and with supply and demand imbalances in the economy persisting, the Fed’s assessment of the ultimate level of the federal funds rate that would be necessary to achieve this goal is higher than had previously expected. We are currently positioned for a recession in the U.S. in the next two quarters. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹Trading Economics. China Trade. October 24, 2022.

²Trading Economics. China Inflation. November 9, 2022.

³Trading Economics. Europe GDP Growth. November 15, 2022.

⁴Trading Economics. Europe Inflation. November 17, 2022.

⁵Trading Economics. Europe Unemployment Rate: Eurostat. November 13, 2022.

⁶Trading Economics. U.S. GDP Growth. October 27, 2022.

⁷Trading Economics. U.S. Inflation. November 10, 2022.

⁸Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. November 4, 2022.

⁹Trading Economics. U.S. FOMC. November 23, 2022.

¹⁰Trading Economics. Canada Inflation. November 16, 2022.

¹¹Trading Economics. Canada Unemployment: Statistics Canada. November 6, 2022.

¹²Trading Economics. Canada Trade: Statistics Canada. November 3, 2022.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. October 31, 2022. Index performance is based on total returns and expressed in the local currency of the index.

November 26, 2022/by Drew Millard

2022 Portfolio Updates, Portfolio Updates

October 2022

The Fed’s continuation of rate hikes in September to fight rising inflation, economic growth and geopolitical risk concerns, and a soaring US dollar combined to drive losses across all asset classes in Q3. During past inflationary environments, inflation came in waves. This time will be no different. As supply induced inflation begins to decline over the coming months, real wage growth – which is negative – will turn positive. Real disposable income will rise. Aggregate demand will increase, pushing back up the steep side of the aggregate supply curve. With global growth on the upswing, commodity prices are expected to recover, causing a second inflation wave.

A second inflation wave will counter the belief that the neutral interest rate is low. After pausing its interest rate tightening campaign, the Fed is expected to begin hiking again in the second half of 2023, bringing the Fed funds rate and U.S. mortgage rates high enough to hit the housing market and the rest of the economy.

Europe will experience a different recovery than in North America, following the Russia imposed energy crisis and as China loosens its zero-Covid policy. Oil prices propelled higher following a decision by OPEC+ to make sizeable cuts to output that tightened supplies in an already strained market. The cuts take effect from November and are the start of an uncertain period for oil supplies heading into the winter, with the European Union set to implement sanctions on Russian flows in December. A recession in the eurozone during the fourth quarter of 2022 and first quarter of 2023 is expected, following deteriorating growth prospects in export markets including the United States and the United Kingdom. Both are expected to enter recessions shortly. In October we maintained our twelve-month forward outlook for the U.S. economy of six months of Recession followed by six months of Stagnation.

The Chinese economy advanced 3.9% year over year in Q3 of 2022, boosted by various measures from Beijing to revive activity. For the first nine months of the year, China’s GDP grew by 3%.¹ The latest figure was released just a day after President Xi Jinping secured a historic third term. China’s surveyed urban unemployment increased to 5.5% in September 2022 from 5.3% in August.² The Eurozone annual inflation rate was revised slightly down to 9.9% in September 2022, the highest rate since comparable records began in 1991, as the bloc’s energy crisis deepened.³ The unemployment rate in the Euro Area fell to a record low of 6.6% in September from an upwardly revised 6.7% in the prior month.⁴

The U.S. economy grew an annualized 2.6% in Q3 2022, rebounding from a contraction in the first half of the year. The biggest positive contribution came from net trade. Imports sank 6.9% while exports were up 14.4%, led by petroleum products.⁵ The U.S. unemployment rate fell to 3.5% in September 2022.⁶ The annual inflation rate in the U.S. slowed to 8.2% in September of 2022. The energy index increased 19.8%, due to gasoline, fuel oil, and electricity. Meanwhile, the core rate – which excludes volatile food and energy – rose to 6.6%, the highest since August of 1982, in a sign inflationary pressures remain elevated.⁷ Canada’s annual inflation rate slowed to 6.9% in September of 2022, below the 39-year peak of the 8.1% hit in June.⁸ The unemployment rate in Canada eased to 5.2% in September of 2022.⁹

Despite making a comeback in July and the first half of August, the S&P 500 slumped to a loss of 4.9% for the quarter while the S&P Mid Cap 400 and S&P SmallCap 600 declined by 2.5% and 5.2%, respectively. Treasury yields continued rising across the curve, resulting in U.S. fixed income index performances mostly negative. Canadian equities slumped into late September and all major indices finished down by single digits in Q3, with the S&P/TSX Composite falling by 1.4%. As central banks globally followed the Fed’s lead, international equities also suffered. The S&P Europe 350 dropped 6.2% in September and 4.04% in Q3, for its third straight quarter of losses. All constituent countries contributed to the S&P Europe 350’s losses, with the S&P United Kingdom pulling down the index most, off 3.1% in the 3rd quarter. The S&P Pan Asia BMI plunged 11.4% in September with all its components down for the month. Japan detracted most from the regional bellwether’s return, dragging the S&P Pan Asia BMI lower by 3.1%. Crude oil remained in a tug-of-war between the deteriorating economic landscape and supply-side risks in October. Gold posted its seventh straight month of declines in its longest losing streak since the late 1960s as rising treasury yields weighed on the non-interest-bearing metal. The stronger US dollar and a deteriorating global demand outlook offset gold’s ability to be a store of value.

In October, our optimization process was unable to identify portfolio solutions for any of our Model Risk Thresholds. With this guidance, we maintained our asset allocation, including the twenty percent cash position across all models.

We are currently positioned for a recession in the U.S. in the next two quarters. Inflationary pressures continue and central banks are steadfast in targeting job growth and core inflation and a second wave of inflation is anticipated. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹Trading Economics. China GDP. October 22, 2022.

²Trading Economics. Unemployment. October 24, 2022.

³Trading Economics. Europe Inflation. October 21, 2022.

⁴Trading Economics. Europe Unemployment Rate: Eurostat. November 3, 2022.

⁵Trading Economics. U.S. GDP Growth. October 27, 2022.

⁶Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. November 4, 2022.

⁷Trading Economics. U.S. Inflation. October 13, 2022.

⁸Trading Economics. Canada Inflation. October 19, 2022.

⁹Trading Economics. Canada Unemployment: Statistics Canada. October 5, 2022.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. September 30, 2022. Index performance is based on total returns and expressed in the local currency of the index.

October 26, 2022/by Drew Millard

2022 Portfolio Updates, Portfolio Updates

September 2022

Despite sub-par global economy GDP growth this year, uncertainty around central bank policy paths continues to dominate markets.

In September, Developed Markets continued to tighten, with their central banks (outside Japan) moving in unison with rate hikes, accompanied by guidance for further tightening ahead. This is a response to two closely related developments. First, central banks are shifting their views on slack with larger and more front-loaded action. Second, their actions have not created results thus far. The Fed hiked the fed funds rate 75 basis points for the third straight meeting to 3.25% in September, followed by tightening from several other central banks, including a 50-basis point hike from the Bank of England. The Bank of Canada continued its steepest rate-hiking path in decades, lifting the overnight rate to 3.25%.¹ Markets sold off both in anticipation of and in response to the Fed’s rate projections and Fed Chair’s comments. In September, we updated our twelve-month forward outlook to six months of Recession followed by six months of Stagnation.

The Chinese economy advanced 0.4% year over year in Q2 of 2022, slowing sharply from 4.8% growth in Q1.² China’s annual inflation fell to 2.5% in August from July’s 2-year high of 2.7%.³ The Euro Area economy expanded 4.1% year-over-year in the second quarter of 2022, the slowest growth in three quarters.⁴ Annual inflation in the Euro Area was confirmed at a record of 9.1% in August. The highest contribution came from energy.⁵ The unemployment rate in the Euro Area edged down to a record low of 6.6% in July.⁶

The U.S. economy contracted an annualized 0.6% on quarter in Q2 2022. The economy technically entered a recession, following a 1.6% drop in Q1.⁷ The U.S. unemployment rate rose to 3.7% in August of 2022, the highest since February.⁸ The annual inflation rate in the U.S. eased for a second straight month to 8.3% in August.⁹ The trade deficit in the U.S. narrowed by $10.2 billion to a 9-month low of $70.7 billion in July. The deficit with China was down by $3.9 billion to $33.0 billion in July with exports rising to $12.8 billion and imports decreasing to $45.8 billion.¹⁰ GDP in Canada expanded by 0.8% on the quarter during the three months leading to June 2022. Canada’s annual inflation rate slowed to 7% in August, from 7.6% in July.¹¹ The unemployment rate in Canada rose to 5.4% in August from the record-low of 4.9% observed in the previous two months.¹² Canada posted a trade surplus of CAD 4.1 billion in July. Exports fell by 2.8% to CAD 68.3 billion, as lower energy prices prompted a decline in sales of energy products.¹³

U.S. equities began August in rebound mode but reversed course to end the month in negative territory after a hawkish Fed and recession fears weighed on investors. The S&P 500 posted a loss of 4.1%, while the S&P Mid Cap 400 and S&P Small Cap 600 saw declines of 3.1% and 4.4%, respectively. Treasury yields rose along with expectations for the future path of Fed hikes. Canadian equities were down in August with the S&P/TSX Composite off 1.6%. The S&P Europe 350 suffered a 4.9% loss in August, with 14 out of its 16 constituent countries ending the month in the red. The U.K. was the biggest contributor to the pan-European benchmark’s losses, partially driven by the British pound’s 3% depreciation against the common currency over the course of the month. The S&P Pan Asia BMI slipped 0.6% in August. Apart from Agriculture, Commodities posted losses across the board.

In September, our optimization process was unable to identify a portfolio solution for the Conservative, Moderate Growth, and Growth Model Portfolios. With this guidance, we added ten percent to the current cash position across the board, bringing cash to 20% across all models. In the Conservative Model we raised the cash by reducing Canadian Equity and Municipal Bonds exposure by 5% each. In the other models, the exposure to the S&P 500 and the Municipal Bonds was reduced by 5% each. In the Canadian models, where there is no exposure to the U.S. Municipal Bond, U.S. Midterm Treasury exposure was reduced by 5%.

Despite the anchoring of medium-term expectations, inflationary pressures continue to broaden with Developed Market core inflation remaining above a 5% this quarter. Central banks are steadfast in targeting job growth and core inflation. As monetary policy is forward looking and works with lags, we remain concerned with a forward-looking policy based on lagging data. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹Trading Economics. Fed Funds Rate. September 21, 2022.

²Trading Economics. China GDP. July 15, 2022.

³Trading Economics. China Inflation. September 9, 2022.

⁴Trading Economics. Europe GDP Growth. September 7, 2022.

⁵Trading Economics. Europe Inflation. September 6, 2022.

⁶Trading Economics. Europe Unemployment Rate: Eurostat. September 1, 2022.

⁷Trading Economics. U.S. GDP Growth. August 25, 2022.

⁸Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. September 2, 2022.

⁹Trading Economics. U.S. Inflation. September 13, 2022.

¹⁰Trading Economics. U.S. Trade Gap: Bureau of Economic Analysis. September 7, 2022.

¹¹Trading Economics. Canada GDP. August 31, 2022.

¹²Trading Economics. Canada Unemployment: Statistics Canada. September 9, 2022.

¹³Trading Economics. Canada Trade. September 7, 2022.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. August 31, 2022. Index performance is based on total returns and expressed in the local currency of the index.

September 26, 2022/by Drew Millard

2022 Portfolio Updates, Portfolio Updates

August 2022

On the heels of the pandemic, the world is now having to deal with spillovers from Russia’s war, which is threatening a recession not only in Europe but across the developed world, and China’s ad hoc lockdowns. Corresponding supply shocks are fueling inflation across the globe, prompting central banks to tighten monetary policy further into restrictive territory. Emerging economies are struggling to cope with currency devaluations. Fiscal withdrawal is adding to the tightening, as governments attempt to address impaired public finances after the COVID-19 related stimulus of recent years. In August, we maintained our outlook for three months of Recession followed by nine months of Inflation for the U.S. economy.

The Chinese economy advanced 0.4% year over year in Q2 of 2022, slowing sharply from a 4.8% growth in Q1. This is the softest pace of expansion since a contraction in Q1 2020, when the initial coronavirus outbreak emerged in Wuhan. For the first half of the year, the economy grew 2.5%.¹ China’s annual inflation rate rose to 2.7% in July 2022 from 2.5% in June.² China’s surveyed urban unemployment inched down to 5.4% in July 2022 from 5.5% in June.³ The Euro Area economy expanded 3.9% year-on-year in the second quarter of 2022.⁴ The annual inflation rate in the Euro Area was confirmed at a new record high of 8.9% in July of 2022.⁵

The American economy shrank an annualized 0.9% on quarter in Q2 2022, following a 1.6% drop in Q1, technically entering a recession.⁶ Net trade made a positive contribution for the first time in two years, as exports jumped 18%, led by industrial supplies, materials, and travel, and imports were up 3.1%.⁷ The U.S. unemployment rate decreased to 3.5% in July 2022, the lowest since February 2020.⁸ The annual inflation rate in the U.S. slowed more than expected to 8.5% in July of 2022 from an over 40-year high of 9.1% hit in June.⁹ Canada’s annual inflation rate was at 7.6% in July of 2022.¹⁰ Canada’s trade surplus widened to CAD 5.0 billion in June of 2022, from a downwardly revised 4.8 billion in the prior month. It was the largest monthly trade surplus since August of 2008, as exports rose 2.0% from a month earlier to a record high of CAD 69.9 billion, primarily driven by higher sales of energy and metals and non-metallic mineral products.¹¹

After a tumultuous first half of the year, U.S. equities staged a comeback in July. The S&P 500 posted a gain of 9.2%, while the S&P Mid Cap 400 and S&P Small Cap 600 performed relatively better, up 10.9% and 10.01%, respectively. Canadian equities rebounded in July, with the S&P/TSX Composite up 4.7%. The S&P Europe 350 gained 7.6% in July, with all its constituent countries ending the month in the black. The U.K. was the biggest contributor to the pan-European benchmark’s gains, partially driven by the British pound’s 3% appreciation against the common currency over the course of the month, rising 3.6%. Worries about slowing growth and a potential recession in Europe drove down sovereign and corporate bond yields across Europe, resulting in broad-based gains for our range of regional fixed-income indices, amongst which the S&P Eurozone 7-10 Year IG Corporate Bond index was the best performer, up 7.1% in July. International equities started to reverse year to date declines, with the S&P Developed Ex-U.S. BMI up 5.3%. The S&P Pan Asia BMI gained 2.4% in July.

In August we continued with the defensive asset allocation that was established in May. Cash remains at 10% across all models. U.S. earnings are showing signs of stress in industries where inflation is impacting consumption. Gold is a safe haven in times of uncertainty, including inflation. Canadian oil and liquid natural gas directed through the U.S. pipeline system for export to Europe is benefiting Canada. Volatility is expected to continue in the fixed income arena. While we monitor events, we have noted that some of the global price pressures have shown signs of easing. Global shipping costs (and times) have been declining and wheat prices have reversed their surge on the initial Russian invasion of Ukraine. Oil prices have fallen from early June, pushing gasoline prices lower. In many countries, higher house prices have also shifted into reverse as early interest rate hikes cool housing markets.

So far in August, global equity markets have retreated, after Federal Reserve Chair Powell closed the door to a near-term dovish pivot at his highly anticipated Jackson Hole appearance on August 26th, signaling that the central bank is likely to keep raising interest rates and leave them elevated for an extended time to curb inflation. As monetary policy is forward looking and works with long and variable lags, we have concerns with a forward-looking policy based on lagging data. The probability of a “soft landing” is becoming less likely. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹Trading Economics. China GDP. July 15, 2022.

²Trading Economics. China Inflation. August 10, 2022.

³Trading Economics. China Unemployment. August 10, 2022.

⁴Trading Economics. Europe GDP Growth. July 15, 2022.

⁵Trading Economics. Europe Inflation. August 18, 2022.

⁶Trading Economics. U.S. GDP Growth. July 28, 2022.

⁷Trading Economics. U.S. Trade. August 4, 2022.

⁸Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. August 5, 2022.

⁹Trading Economics. U.S. Inflation. August 10, 2022.

¹⁰Trading Economics. Canada Inflation. August 16, 2022.

¹¹Trading Economics. Canada Trade. August 4, 2022.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. July 31, 2022. Index performance is based on total returns and expressed in the local currency of the index.

August 26, 2022/by Drew Millard

2022 Portfolio Updates, Portfolio Updates

July 2022

The World Bank and the OECD have slashed their global growth expectations, citing the surge in energy and food prices, along with disruptions from the Ukrainian war and ongoing pandemic restrictions in China.¹ While businesses are grappling with labor shortages and surging wage growth, consumer demand remains strong, and the persistence of very high price growth has been pushing longer run inflation expectations higher. The rising risk of stagflation in the world economy is tipping toward risk of recession as Central Banks have turned increasingly hawkish to counter elevated inflationary pressures. Energy and food price shocks are leading many countries into slowing growth, tighter living standards, and a deteriorating political climate. The extent of the inflation spiral and a rising probability of a recession are, together, acting as a headwind to finding a true market equilibrium. In July, we maintained our outlook for three months of Recession followed by nine months of Inflation for the U.S. economy.

The Chinese economy advanced 0.4% in Q2 of 2022, amid the lingering impact of outbreaks and “shrinking demand” at home.² China’s annual inflation rate climbed to 2.5% in June 2022, with food prices rising the most in 21 months.³ China’s surveyed urban unemployment declined to 5.5% in June.⁴ The annual inflation rate in the Euro Area increased to a new record high of 8.6% in June of 2022, strengthening the case for the ECB’s first rate hike in 11 years in July.⁵ The unemployment rate in the Euro Area edged lower to a fresh record low of 6.6% in May.⁶

The American economy contracted an annualized 1.6% in Q1 2022.⁷ Expectations are for a second negative quarter in Q2. The trade deficit narrowed in May, as exports hit a record high while soaring prices and slowing domestic demand weighed on imports. The goods deficit widened with China, the EU, and Canada, but narrowed with Mexico and Russia.⁸ The annual inflation rate in the U.S. accelerated to 9.1% in June of 2022, the highest since November of 1981.⁹ Canada’s trade surplus broadened to CAD 5.3 billion in May of 2022. It was the largest monthly trade surplus since August of 2008, as exports rose 4.1%, largely driven by high prices of energy products.¹⁰ Canada’s annual inflation rate rose to 8.1% in June, the highest since January 1983.¹¹

Equities and bonds have seen sharp selloffs this year. The drawdown in equities reflects the difficult tradeoff confronting central banks on growth and inflation. U.S. equities posted their worst first half performance since 1970. The S&P 500 posted a loss of 19.96%, while the S&P Mid Cap 400 and S&P Small Cap 600 performed marginally better, down 19.5% and 18.94%, respectively. Canadian equities experienced a dismal first half of the year, with the S&P/TSX Composite down 9.9%. In Europe, Portugal was the only country that made a positive contribution to the S&P Europe 350 this quarter, while the trio of Germany, Switzerland, and France weight heavily on the pan-European benchmark, pulling it to a loss of 8.7% in Q2. U.K. equities significantly outperformed their Eurozone peers, dropping just 3.0% in Q2. The S&P Pan Asia BMI lost 6.4% in June to complete its worst quarter since Q1 2020 and its fourth consecutive losing quarter.

The near-term risk of a renewed repricing in markets amid persistent inflation pressures caused us to adjust our asset allocation in May. In July we maintained the defensive asset allocation that was set at that time. Cash remains at 10% across all models. U.S. earnings are beginning to show signs of stress in industries where inflation is impacting consumption. The safe haven status of gold in times of uncertainty, including war and inflation, is central in our asset allocation. Canadian oil and liquid natural gas directed through the U.S. pipeline system for export to Europe is benefiting Canada. Volatility is expected to continue in the fixed income arena. While we monitor events, we have noted that some of the global price pressures have shown signs of easing. Global shipping costs (and times) have been declining and wheat prices have reversed their surge on the initial Russian invasion of Ukraine. Oil prices have fallen from early June, pushing gasoline prices lower into July. In many countries, higher house prices have also shifted into reverse as early interest rate hikes cool housing markets.

The probability of a “soft landing” is becoming less likely. Poor consumer sentiment in reaction to rapidly rising prices is at odds with strong household balance sheets, leading to an uncertain path for discretionary spending. The current environment reinforces the importance of distinguishing investment views on tactical (6-12 months) and strategic (five years and beyond) horizons. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹OECD Economic Outlook. June 8, 2022.

²Trading Economics. China GDP Growth. July 15, 2022.

³Trading Economics. China Inflation. July 9, 2022.

⁴Trading Economics. China Unemployment. July 15, 2022.

⁵Trading Economics. Europe Inflation. July 1, 2022.

⁶Trading Economics. Europe Unemployment Rate: Eurostat. June 1, 2022.

⁷Trading Economics. U.S. GDP Growth. May 26, 2022.

⁸Trading Economics. U.S. Trade Gap: Bureau of Economic Analysis. July 7, 2022.

⁹Trading Economics. U.S. Inflation. July 13, 2022.

¹⁰Trading Economics. Canada Trade Surplus. July 7, 2022.

¹¹Trading Economics. Canada Inflation. July 20, 2022.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. June 30, 2022. Index performance is based on total returns and expressed in the local currency of the index.

July 26, 2022/by Drew Millard

2022 Portfolio Updates, Portfolio Updates

June 2022

Escalating geopolitical tensions related to uncertainty around the war in Ukraine and prolonged supply chain disruptions have shifted stagflation concerns towards recession, as the first quarter of 2022 in in U.S. experienced negative growth. The emergence of highly transmissible COVID-19 variants also continues to risk derailing the global economic recovery. Central banks are weighing aggressive monetary tightening, in response to the current high inflation against recession risks. The inflation that we are experiencing today is less a ‘monetary phenomenon’ and more the result of adverse supply shocks, coupled with large fiscal injections that occurred during the pandemic. Any restrictive Fed hikes will coincide with a tightening of fiscal policy, economic weakness abroad, and war on Europe’s doorstep, fueling further commodity dislocation. In June, we maintained our outlook for three months of Recession followed by nine months of Inflation for the U.S. economy.

China is currently experiencing an Omicron outbreak that has prompted lockdowns and a prolonged downturn in the property sector. The Chinese economy expanded 4.8% year over year in Q1 of 2022, slowing from an 8.1% expansion last year, which was the steepest pace in nearly a decade. Retail sales fell 3.5%, down for the first time since July 2020.¹ China’s annual inflation rate was at 2.1% in May 2022.² The Euro Area economy expanded 5.4% year-on-year in the first three months of 2022, the biggest annual gain in three quarters.³ Annual inflation rate in the Euro Area increased to 8.1% in May of 2022, a fresh record high, from 7.4% in each of the previous two months.⁴ The unemployment rate in the Euro Area was unchanged at a record low of 6.8%.⁵

The U.S. economy contracted an annualized 1.5% on quarter in the first three months of 2022. Imports surged and exports dropped slightly less.⁶ The annual inflation rate in the U.S. unexpectedly accelerated to 8.6% in May of 2022, the highest since December of 1981. Energy prices rose 34.6%, due to gasoline (48.7%), fuel oil (106.7%, the largest increase on record), electricity (12%), and natural gas (30.2%).⁷ The trade deficit in the U.S. narrowed to a four-month low of $87.1 billion in April of 2022. Exports were up 3.5% to a record high. The deficit with China decreased $8.5 billion to $34.9 billion, with imports falling by $10.1 billion, the most in seven years.⁸ GDP in Canada expanded 0.8% on quarter in the first three months of 2022, the weakest performance in three quarters, due to a 2.4% drop in international exports volumes, mostly energy products.⁹ Canada’s annual inflation rate increased to 6.8% in April of 2022, the highest since January of 1991.¹⁰ The unemployment rate in Canada fell to 5.1% in May of 2022.¹¹ Canada posted a trade surplus of CAD 1.5 billion in April of 2022, narrowing from a downwardly revised 2.3 billion surplus in the prior month.¹² The Canadian central bank hiked the overnight rate by 50 basis points to 1.5% in early June.¹³

Equity market risk has shifted from interest rates (and the discount rate) to earnings. U.S. equities suffered in May, as inflation concerns along with Fed rate hikes weighed on markets. As a result of a comeback in the final week of the month, the S&P 500 posted a slight gain of 0.2%, while the S&P Mid Cap 400 and S&P SmallCap 600 were up 0.8% and 1.9%, respectively. U.S. fixed income performance was mostly positive while gains in commodities continued, particularly in the Energy sector. Canadian equities were flat for the month, with the S&P/TSX Composite up 0.1%. Switzerland and Denmark weighed heavily on the S&P Europe 350, pulling the benchmark to a loss of 0.6% in May. Among S&P Europe 350 sectors, Energy took the top spot with an 11% gain, extending its year-to-date advance to 36%. U.K. inflation-linked bonds were hit particularly hard, off 9%, extending its decline for a sixth straight months. The S&P China 500 and S&P Hong Kong BMI both gained 3%.

In June we maintained the defensive asset allocation that was set in May. Cash remains at 10% across all models. U.S. earnings are beginning to show signs of stress in industries where inflation is impacting consumption. The safe haven status of gold in times of uncertainty, including war and inflation, is central in our asset allocation. Canadian oil and liquid natural gas directed through the U.S. pipeline system for export to Europe is benefiting Canada.

June has witnessed financial market volatility and uncertainty. The war in Ukraine and sanctions on Russia continue to push prices of commodities higher. The current positively correlated bond and equity markets have created an investment environment where opportunities are rare and fluid. Our outlook reflects these developments. Our approach to portfolio management is nimble, opportunistic, and deliberate in identifying asset classes that are best placed to generate returns in a new world order. Our focus is on protecting portfolios from downside risk, and we believe that our investment process is working to achieve that goal.

Deborah Frame, President and CIO

¹Trading Economics. China GDP. April 18, 2022.

²Trading Economics. China Inflation. June 10, 2022.

³Trading Economics. Europe GDP Growth. June 6, 2022.

⁴Trading Economics. Europe Inflation. May 31, 2022.

⁵Trading Economics. Europe Unemployment Rate: Eurostat. June 1, 2022.

⁶Trading Economics. U.S. GDP Growth. May 26, 2022.

⁷Trading Economics. U.S. Inflation. June 10, 2022.

⁸Trading Economics. U.S. Trade Gap: Bureau of Economic Analysis. June 7, 2022.

⁹Trading Economics. Canada GDP. May 31, 2022.

¹⁰Trading Economics. Canada Inflation. May 18, 2022.

¹¹Trading Economics. Canada Unemployment: Statistics Canada. June 10, 2022.

¹²Trading Economics. Canada Trade. June 7, 2022.

¹³Trading Economics. Canada Central Bank Rate Decision. June 1, 2022.

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. May 31, 2022. Index performance is based on total returns and expressed in the local currency of the index.

June 26, 2022/by Drew Millard