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.