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.