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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

 

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

2 Trading Economics. Unemployment. October 24, 2022.

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

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

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

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

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

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

9 Trading 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.

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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

 

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

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

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

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

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

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

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

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

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

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

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

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

13 Trading 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.

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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

 

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

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

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

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

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

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

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

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

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

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

11 Trading 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.

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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

 

1 OECD Economic Outlook. June 8, 2022.

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

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

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

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

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

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

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

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

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

11 Trading 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.

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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

 

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

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

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

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

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

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

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

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

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

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

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

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

13 Trading 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.

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May 2022

The economic recovery from the downturn caused by the coronavirus pandemic continues and multiple macro risks persist. Inflation due to supply shortages as well as fiscal spending, government debt, more hawkish central banks, and an uncertain labour market are afflicting developed economies around the world. The risk of a sharp slowdown in the coming months has heightened. Concerns over recession are starting to outweigh those of inflation. In May, we pushed out our Inflation outlook and updated our current outlook to three months of Recession followed by nine months of Inflation for the U.S. economy.

The Chinese economy expanded 4.8% year over year in Q1 of 2022. March activity showed retail sales fell 3.5%.1 China’s annual inflation rate accelerated to 2.1% in April 2022 from 1.5% in March, the highest reading since last November.2 The Gross Domestic Product in the Euro Area expanded 5.1% in the first quarter of 2022.3 The economic outlook for the Euro Area is subdued as the war in Ukraine continues, exerting upward pressures on commodity prices. The annual inflation rate in the Euro Area rose to a record high of 7.5%.4 The unemployment rate in the Euro Area fell to a record low of 6.8% in March. Among the biggest economies in the Eurozone, declines in the jobless rate were seen in Germany (2.9% vs 3%) and Italy (8.3% vs 8.5%).5

The American economy contracted at an annualized 1.4% in the first three months of 2022, following 6.9% growth in Q4 2021. Gross private domestic investment slowed sharply (2.3% vs 36.7%).6 Annual inflation slowed to 8.3% in April from a 41-year high of 8.5%.7 The U.S. trade deficit widened sharply to a record high in March. Exports dropped 5.9%, while imports surged 17.7%. The trade deficit with China increased to $34 billion from $30.7 billion in February.8 Canada’s annual inflation rate rose to 6.7% in March, against the backdrop of sustained housing prices, substantial supply constraints, and geopolitical conflict that lifted prices for energy and agricultural markets.9 The unemployment rate in Canada fell to 5.2% in April.10 Canada posted a trade surplus in March, largely due to crude oil and bitumen, as the war in Ukraine lifted energy prices worldwide.11

U.S. equities continued to face obstacles in April, as poorly received earnings, especially from Big Tech, inflation fears, and looming Fed rate hikes were reflected in the markets. The S&P 500 posted a loss of 8.7%, logging its worst monthly performance since March 2020. The S&P MidCap 400 and S&P SmallCap 600 were down 7.1% and 7.8%, respectively. U.S. fixed income was weak across the board. The S&P/TSX Composite was down 4.9% in April. International equities also disappointed in April, with the S&P Developed Ex-U.S. BMI down 7% and the S&P Emerging BMI down 5%. The Netherlands and Germany weighed heavily on the S&P Europe 350, pulling the benchmark to a loss of 0.4% in April. U.K. equities bucked the trend, rising 0.9% and moving up to 6% year-to-date. Among S&P Europe 350 sectors, Consumer Staples took the top spot with a 5% gain, while Information Technology fell a full 7%. The S&P Pan Asia BMI extended its losses into April, plunging 6.4% and posting a fourth consecutive month of declines. Japan dragged the index down the most. Bonds moved in tandem with equities, with both local currency and USD-denominated debt edging lower across Asia, declining 4% and 3%, respectively.

In response to the inability of our optimizer to find a solution for our most conservative model in May, we updated our asset allocation, increasing cash to 10% in all models and reducing exposure to large-cap U.S. equities by the same amount. We continue to see U.S. earnings as strong, but inflation is beginning to hit consumption in many industries. 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 will benefit Canada.

As the war in Ukraine and sanctions on Russia continue to push prices of commodities higher, high inflation readings and hawkish messaging from Central Banks have caused sovereign bond yields to continue their ascent. 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

 

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

2 Trading Economics. China Inflation. May 11, 2022.

3 Trading Economics. Europe GDP Growth. May 17, 2022.

4 Trading Economics. Europe Inflation. April 29, 2022.

5 Trading Economics. Europe Unemployment Rate: Eurostat. May 3, 2022.

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

7 Trading Economics. U.S. Inflation. May 1, 2022.

8 Trading Economics. U.S. Trade Gap: Bureau of Economic Analysis. May 4, 2022.

9 Trading Economics. Canada Inflation. April 20, 2022.

10 Trading Economics. Canada Unemployment: Statistics Canada. May 6, 2022.

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

 

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

 

 

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April 2022

The recent inflation surge is generating two challenges to the global expansion. The immediate one comes from a squeeze in household purchasing power, concentrated in Europe and low-income commodity importing nations. If growth stalls in the second half of the year, it will likely have negative repercussions for both growth and inflation. If growth proves resilient, then risks rise that the inflation surge passes through to price and wage setting, requiring tight monetary stances. In April, we updated our current outlook to three months of inflation followed by nine months of stagnation for the U.S. economy.

The Chinese economy expanded 4.8% year over year in Q1 of 2022.1 China policymakers are dealing with a significant weakening amid lockdowns to bring the Omicron wave under control. China’s surveyed urban unemployment increased to 5.8% in March 2022 from 5.5% in the previous month. The latest figure marked the highest jobless rate since May 2020, amid re-imposing COVID-19 restrictions following widespread outbreaks.2 The annual inflation rate in the Euro Area surged to an all-time high of 7.5% in March, compared to 5.9% in February, as the war in Ukraine and sanctions on Russia pushed fuel and natural gas prices to record high levels. Energy recorded the highest annual rate, with prices of other items, including food rising also.3 The unemployment rate in the Euro Area fell to a record low of 6.8% in February of 2022. Among the biggest economies in the Eurozone, declines in the jobless rate were seen in Spain, Italy, and France.4

The American economy expanded an annualized 6.9% annualized in the last three months of 2021.5 The U.S. unemployment rate declined to 3.6% in March from 3.8% in the previous month.6 The annual inflation rate in the U.S. accelerated to 8.5% in March of 2022, the highest since December of 1981. Energy prices increased 32%, as gasoline and fuel oil were impacted by Russia’s invasion of Ukraine. Food prices jumped 8.8%, the most since May 1981.7 The trade deficit in the U.S. remained near record levels of $89.18 billion in February, as imports continue to rise amid robust demand and rising oil prices. Imports were up 1.3%, on higher shipments of crude oil, other chemicals and petroleum products, fuel oil, and capital goods. Trade deficits were recorded with China, the EU, Mexico, and Canada. The goods gap with Russia widened to $2.1 from $1.6 billion.8

The unemployment rate in Canada fell to 5.3% in March from 5.5% in February. It was the lowest rate on record since comparable data became available in 1976, marking a robust recovery for the labor market from the Covid-19 pandemic.9 Canada posted a trade surplus in February, narrowing from an upwardly revised 13-year high surplus in the previous month. Imports rose by 3.9%, due to uncertainty about the future supply of metals from Russia. Exports rose by 2.8% to a record-high, led by sales of energy products (up 7.8%), largely due to soaring prices because of the war in Ukraine.10

The U.S. S&P Large Cap 500 faced a turbulent quarter, down 4.6%. Smaller caps underperformed, with the S&P MidCap 400 and S&P SmallCap 600 down 4.9% and 5.6% for the quarter, respectively.  An inverted yield curve signaled concerns of an impending recession. U.S. fixed income performance was weak across the board. Gains in commodities continued, driven by Energy’s outperformance. Canadian equities outperformed the U.S. in Q1, with the S&P/TSX Composite up 3.8%. Energy posted a 29% gain. The S&P Europe 350 rebounded from losses suffered in the first two months of the year, resulting in a negative 4.9% in the first quarter. Most sectors and countries represented in the benchmark declined in Q1 2022. Energy was the best performing sector, up 18%. The United Kingdom and Norway contributed positively to the region’s returns in the quarter, while German equities were the most negative. The S&P Pan Asia BMI posted three consecutive months of declines, down 6.2% for the quarter. Amongst local market gauges, the S&P China 500 sank 14.3% in the first three months of 2022.

We have maintained our asset allocation across all models in April. Last month’s move to reduce exposure to the 3-to-7-year U.S. Treasury bond and add to Gold and Canadian Equities has had a positive impact on the portfolio. We continue to rely on the safe haven status of gold in times of uncertainty, including war and inflation. Canadian oil and liquid natural gas directed through the U.S. pipeline system for export to Europe along with their higher prices will benefit Canada. We are monitoring large cap U.S. equity exposure.

The Russian-Ukraine conflict, surging inflation, and concerns about the Fed’s rate hike plan have led to the S&P 500’s worst quarter in two years. Real interest rates remain low and private sector balance sheets are healthy. 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

 

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

2 Trading Economics. China Unemployment. April 18, 2022.

3 Trading Economics. Europe Inflation. April 1, 2022.

4 Trading Economics. Europe Unemployment Rate: Eurostat. March 31, 2022.

5 Trading Economics. U.S. GDP Growth. March 30, 2022.

6 Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. April 1, 2022.

7 Trading Economics. U.S. Inflation. April 12, 2022.

8 Trading Economics. U.S. Trade Gap: Bureau of Economic Analysis. April 5, 2022.

9 Trading Economics. Canada Unemployment: Statistics Canada. April 8, 2022.

10 Trading Economics. Canada Trade Surplus. April 5, 2022.

 

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

 

 

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March 2022

We have lowered our 2022 global GDP growth outlook following the invasion of Ukraine by Russia, one month ago. A commodity supply shock has pushed up CPI inflation expectations and contributed to a shift in our expectations regarding the timing and size central bank rate hikes. Our outlook focuses on the reflationary consequences of strong underlying demand and rapidly tightening supply as well as the commodity and financial market response to the Russian invasion of Ukraine. Against the backdrop, in March, we maintained our current outlook of three months of inflation followed by nine months of growth for the U.S. economy.

The Chinese economy faces elevated risks due to their somewhat less effective vaccines and the zero-tolerance policy on Covid infections. China’s annual inflation rate stood at 0.9% in February 2022.1 China’s surveyed urban unemployment was at 5.5% in February, up from 5.3% in January.2 GDP in the Euro Area expanded 4.6% year-on-year in the fourth quarter of 2021.3 The annual inflation rate in the Euro Area rose to a record high of 5.9% in February from 5.1% in January.4 Russian energy became a pressure point in the war in Ukraine, with the U.S. banning oil and gas imports, the U.K. banning oil imports, and the European Commission aiming to cut gas imports by two-thirds.

Given the combination of an aggressively tight labor market and significantly above-target inflation, the Fed has waited much longer to start raising rates than at any point over the last 30 years. The U.S. unemployment rate edged down to 3.8% in February from 4% in the previous month, a new pandemic low.5 Annual inflation rate in the U.S. accelerated to 7.9% in February, the highest since January of 1982.6 The U.S. trade deficit widened to a record high of $89.7 billion in January from an upwardly revised $82 billion in the previous month. It reflects an increase in the goods deficit of $7.1 billion to $108.9 billion, as soaring energy costs pushed imports to a record high while the services surplus narrowed by $0.6 billion to $19.2 billion.7 The Canadian economy grew by 1.6% in the fourth quarter of 2021, the most in 4 quarters and following a 1.3% expansion in the third quarter.8 Canada’s annual inflation rate quickened to 5.7% in February, the highest since August of 1991.9 The unemployment rate in Canada fell to 5.5% in February from 6.5% in January. It was the lowest jobless rate since January of 2020, officially reaching pre-pandemic levels after 25 months.10 Canada posted a trade surplus of CAD $2.62 billion in January of 2022, compared with a downwardly revised deficit of CAD $1.58 billion in December. It was the widest trade surplus since September of 2008.11

The Federal Reserve is now challenged to balance increasing inflation expectations with the risk of a slowdown caused by the war in Europe, approving a 1/4 percentage point increase in the primary credit rate to 0.5%, effective March 17, 2022. Over 99% of S&P 500 companies have reported fourth-quarter earnings with earnings per share growth of 32%. First-quarter estimates are much lower at 5%. U.S. equities faced a challenging February, with the S&P 500 declining 3.0%. Smaller caps outperformed, with the S&P MidCap 400 and S&P SmallCap 600 up 1.1% and 1.4%, respectively. Energy continued its position as the best-performing sector in the S&P 500, up 7.1%, and was the only sector to post a gain.  Canadian equities were flat in February, with the S&P/TSX Composite up 0.3%. The S&P Europe 350 extended its January losses in February with another 3.0% decline, leaving it down 5.9% year-to-date.  The U.K. was up 0.8% in February. The S&P Pan Asia BMI declined 0.9%, weighed down by the S&P China 500, down 1.7%. Australia and New Zealand helped with gains.

We adjusted our Asset Allocation across all models in March. We reduced exposure to the 3-to-7-year U.S. Treasury bond by 15% and added 5% to the current gold exposure and 10% to Canada equities. We continue to rely on the safe haven status of gold in times of uncertainty, including war and inflation. Canadian oil and liquid natural gas directed through the U.S. pipeline system for export to Europe along with their higher prices will benefit Canada. We are monitoring large cap U.S. equity exposure. U.S. fiscal spending that will fund local governments supports our exposure to short-term treasuries and municipal bonds in the U.S. We believe that U.S. rate increases in 2022 will be done cautiously so as not to risk causing a recession.

Our expected lower GDP growth forecast is driven by higher commodity prices and tightening global financial conditions as shifting expectations for central banks and inflation risks push global interest rates higher. Meanwhile, real interest rates remain low, private sector balance sheets are healthy, and the impact of the global commodity shock is for now, limited. 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

 

1 Trading Economics. China Inflation. March 16, 2022.

2 Trading Economics. China Unemployment. March 16, 2022.

3 Trading Economics. Europe GDP Growth. March 8, 2022.

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

5 Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. March 4, 2022.

6 Trading Economics. U.S. Inflation. March 10, 2022.

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

8 Trading Economics. Canada GDP Growth. March 1, 2022.

9 Trading Economics. Canada Inflation. March 16, 2022.

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

11 Trading Economics. Canada Trade Surplus. March 8, 2022.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. February 28, 2022. Index performance is based on total returns and expressed in the local currency of the index.

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February 2022

Geopolitical escalation in February has materially increased the risk of further aggravating the energy and commodity crisis developing over the past 2 years. After weeks of rising tensions, Russia launched a full-scale invasion of Ukraine on February 24th. The U.S., in cooperation with its Western allies, has responded by imposing sanctions against Russia, prompting significant shifts in global markets. Resulting higher commodity prices, especially in food and energy, will exacerbate inflation in the U.S. and other developed economies, slowing economic growth, and leading to stagflation. In February, we have maintained out current outlook of three months of inflation followed by 9 months of growth for the U.S. economy. We will revisit this outlook as events evolve.

China’s annual inflation rate fell to 0.9% in January 2022 from 1.5% a month earlier. This was the lowest reading since last September, as the cost of food dropped the most in four months.1 The Euro Area economy expanded 4.6% year-on-year in the last three months of 2021.2 The annual inflation rate in the Euro Area edged higher to a fresh record high of 5.1% in January of 2022. Energy continues to record the biggest price increase.3 The unemployment rate in the Euro Area fell to 7% in December of 2021. Among the biggest economies in the Eurozone, declines in the jobless rate were seen in Spain (13% vs 13.4% in November), Italy (9% vs 9.1%) and France (7.4% vs 7.5%).4

The American economy expanded an annualized 6.9% in Q4 2021, higher than the 2.3% in Q3.5 The annual inflation rate in the U.S. accelerated to 7.5% in January of 2022, the highest since February of 1982, as soaring energy costs, labour shortages, and supply disruptions coupled with strong demand weighed on the number.6 The U.S. unemployment rate edged up to 4.0% in January of 2022, little changed from December’s new pandemic low.7 The U.S. trade gap in both goods and services rose 27% to hit $859 billion in 2021, an annual record as imports grew faster than exports. The imports surged 20.5% or $576.5 billion last year, as Americans purchased more foreign products and strong demand pushed up the prices. Exports were up 18.5% or $394.1 billion.8 Canada’s headline inflation rate accelerated to 5.1% in January of 2022, remaining the highest since September 1991. COVID-19 pandemic-related challenges continued to weigh on supply chains, and energy prices remained elevated.9 The unemployment rate in Canada rose to 6.5% in January of 2022 from an upwardly revised 6% in December of 2021.10

Anxiety about impending rate hikes as well as a tapering in asset purchases by the Fed to combat inflation led to the worst monthly performance for U.S. equities since March 2020, with the S&P 500 down 5.2% in January. Smaller caps performed even worse, with the S&P MidCap 400 down 7.2% and the S&P SmallCap 600 down 7.3%. Energy was the only sector to post a gain in January, up a staggering 19.1%, boosted by the continued rise in oil prices. In Canada, The S&P/TSX Composite was down 0.4%. Energy posted a 12.5% gain. The S&P Europe 350 started 2022 on the back foot, finishing January down 3.0% and giving back its gains since the end of November 2021. The U.K. was the sole country to make a significant positive contribution, while the Netherlands and Switzerland were the largest detractors; each pulled back the overall return by -1%. Energy and Financials stood out among pan-European sectors, rising 13.5% and 4.4%, respectively, while consistent with global trends, Information Technology was the main laggard, plunging 12.9%.

In February, we adjusted our Asset Allocation across all models. Total exposure to small and mid-cap equities was replaced with exposure to gold. This reflects the safe haven status of gold in times of uncertainty, including war and inflation. We are monitoring large cap U.S. equity exposure as we weigh the impact of multiple factors including Fed tightening, the impact of the pandemic, and geopolitics involving Russia-Ukraine against a strong earnings season. U.S. fiscal spending that will fund local governments in the pending infrastructure bill supports our exposure to short-term treasuries and municipal bond exposure in the U.S. We believe that U.S. rate increases in 2022 will be done cautiously so as not to risk causing a recession.

The reality of what could turn out to be the biggest conflagration in Europe since the Second World War has been reflected immediately in global equity markets and pressures have broadened across sectors. The base effects and volatility generated by the pandemic are still affecting the data, and additional supply side issues that had begun to normalize are reversing. From U.S.–China decoupling to the shift to a low-carbon economy to the rise of technologies, we are not going back to the 1990s, when cheap goods were the zero-inflation offset for the rising cost of housing, as well as education and healthcare. 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

 

1 Trading Economics. China Inflation. February 16, 2022.

2 Trading Economics. Europe GDP Growth. February 15, 2022.

3 Trading Economics. Europe Inflation. February 2, 2022.

4 Trading Economics. Europe Unemployment Rate: Eurostat. February 1, 2022.

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

6 Trading Economics. U.S. Inflation. February 10, 2022.

7 Trading Economics. U.S. Unemployment: U.S. Bureau of Labor Statistics. February 4, 2022.

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

9 Trading Economics. Canada Inflation. February 16, 2022.

10 Trading Economics. Canada Unemployment: Statistics Canada. February 4, 2022.

 

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

 

 

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January 2022

The International Monetary Fund cut its world economic growth forecast for 2022 as the Covid-19 pandemic enters its third year, citing weaker prospects for the U.S. and China along with persistent inflation. Concerns over the stalled talks between Russia and NATO allies have added a layer of geopolitical risk to the heightened uncertainty. The IMF has estimated that the world economy expanded 5.9% last year, the most in four decades. That followed a 3.1% contraction in 2020 that was the worst peacetime decline in broader figures since the Great Depression.1

The IMF has indicated that inflation is expected to remain elevated in the near term, averaging 3.9% in advanced economies and 5.9% in emerging market and developing economies in 2022, before subsiding in 2023.2 A big part of the inflation story involves trade decoupling and increased support for domestic labor. Central banks that slashed interest rates to soften the economic decline caused by the pandemic face pressure to tighten policy to confront surging consumer prices, threatening to curtail the growth rebound. Governments also have less fiscal space for spending to address health needs and buoy their economies after piling up record debt. In January, we revised forecast of Growth (U.S. GDP greater than 2.5%) to an Inflation Outlook (U.S. CPI greater than 3.5%) for the first three months and Growth for the remaining nine months of the twelve -month forecast horizon.

China’s economic growth slowed during the fourth quarter of 2021. The economy expanded by 4.0% year-on-year in October-December, as multiple headwinds including a property downturn, supply chain issues, and COVID-19 outbreaks occurred. In the full year of 2021, the economy grew 8.1%, the fastest expansion in nearly a decade.3 China’s trade surplus in 2021 widened to USD 676.4 billion, the highest on record, from USD 524 billion in 2020, as exports surged 29.9% and imports 30.1%. China’s trade surplus with the U.S. was USD 396.58 billion for the whole of 2021, 25% higher than in 2020.4

The Eurozone economy expanded 3.9% year-on-year in the third quarter of 2021.5 Annual inflation in the Euro Area accelerated for the sixth straight month to a record high of 5% in December of 2021 from 4.9% in November.6 Annual inflation in the U.K. increased to 5.4% in December of 2021 from 5.1% in November. This is the highest reading since March 1992.7

The U.S. economy grew by an annualized 2.3% on quarter in Q3 2021. A resurgence of COVID-19 cases resulted in new restrictions and delays in the reopening of establishments in some parts of the country.8 Government assistance payments in the form of forgivable loans to businesses, grants to state and local governments, and social benefits to households all decreased in the third quarter. The annual inflation rate accelerated to 7% in the last month of 2021, a fresh high since June of 1982.9 Energy was the biggest contributor to the gain. Inflation spiked in 2021 due to soaring energy costs, pandemic-induced supply constraints, labour shortages, increasing demand, and a low base effect from 2020. In the United States, a sharp decline in unemployment has been accompanied by nominal wage growth, a degree of tightening in U.S. labor markets that is not occurring in other economies. Tighter labor markets may feed through to higher prices. As a result, the Federal Reserve communicated in December 2021 that it will taper asset purchases at a faster pace and signaled that the federal funds rate will be raised in 2022.

Despite the ongoing pandemic, U.S. equities had a banner year in 2021, with the S&P 500 reaching 70 closing highs on its way to a 28.7% return. Mega-caps outperformed, with the S&P 500 Top 50 up 30.8%. Small-Caps outperformed Mid-Caps in 2021, with the S&P Small Cap 600 up 26.8% while the S&P Mid Cap 400 was up 24.8%. Canadian equities had a strong year, with the S&P/TSX Composite up 25.1%, the best performance since 2009. The S&P Europe 350 set several new records, adding 5.6% in the final month to finish 2021 with a 26.1% total return. The Netherlands, Austria, Sweden, Italy, and France all had positive contributions. The S&P Pan Asia BMI gained 2.1% in December, narrowly moving into the black for 2021 with a gain of 0.9%. The market standard commodities benchmark, the S&P GSCI, rose 40.4% in 2021, as high and rising inflation provided a backdrop for this inflation-sensitive asset class. Commodities finished strong in December, rising 7.6% over the month as energy bounced back.

In January, we maintained our Asset Allocation across all models. We are monitoring U.S. equity exposure as we gauge the impact of multiple factors including Fed tightening, the impact of the pandemic, and geopolitics involving Russia-Ukraine. The high multiples and ‘intentional plan to lose money now because the future is huge’ business models have led to volatility and corrections in January. Corporate earnings across all market caps were solid in Q3 and are being monitored as reporting begins for Q4. U.S. fiscal spending that will fund local governments in the pending infrastructure bill supports our exposure to short-term treasuries and municipal bond exposure in the U.S. We believe that U.S. rate increases in 2022 will be done cautiously so as not to risk causing a recession.

The changing picture of the economy comes with structural challenges but eventually leads to improved liquidity, healthy consumer balance sheets, and a healing labor market. From U.S.–China decoupling to the shift to a low-carbon economy to the rise of technologies, we are not going back to the 1990s, when cheap goods were the zero-inflation offset for the rising cost of housing, as well as education and healthcare. 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

 

1 International Monetary Fund. World Economic Outlook. January 2022.

2 International Monetary Fund. World Economic Outlook. January 2022.

3 Trading Economics. China GDP Growth. January 17, 2022.

4 Trading Economics. China Trade. January 14, 2022.

5 Trading Economics. Eurozone GDP Growth. December 7, 2021.

6 Trading Economics. Europe Inflation. January 7, 2022.

7 Trading Economics. U.K. Inflation. January 19, 2022.

8 Trading Economics. U.S. GDP Growth. December 22, 2021.

9 Trading Economics. U.S. Inflation. January 12, 2022.

 

Index return data from Bloomberg and S&P Dow Jones Indices Index Dashboard: U.S., Canada, Europe, Asia, Fixed Income. December 31, 2021. Index performance is based on total returns and expressed in the local currency of the index.

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