Market Commentary – Fourth Quarter 2021

The global economic recovery continued in the fourth quarter of 2021, but at a slower pace and with emerging distinctions between industries. Notably, energy prices continued to push higher, extending the energy sector’s winning streak and putting those in the “inflation is transitory” camp – not to mention managers of fossil fuel free funds – in uncomfortable positions. Late quarter anxieties around virus developments and central bank policy added to volatility, started a flight to safety, and would be a sign of what was to come to start 2022.

As has been the case for many years, monetary policy was in focus to end 2021. With inflation becoming more firmly entrenched in global economies, guidance from both the U.S. Federal Reserve Bank (Fed) and the Bank of Canada (BoC) was for tighter monetary policy (accelerated tapering of bond purchases and increases in key policy interest rates). Central banks are in a precarious position; with growth slowing, excessive tightening would not be welcomed by equity investors. Against this backdrop, the FTSE Canada Universe Bond Index gained 1.47% over the quarter. Bond investors would not be so fortunate in January, as additional expectations for rate hikes hit the bond market hard, leading to steep losses in fixed income investments.

Like the bond market, equity markets had not yet fully priced in tightening monetary conditions – or potential policy mistakes – to close out the year. The MSCI All Country World Index rose 7.1% in local-currency terms (6.5% in Canadian dollar terms) in the fourth quarter, capping off another strong year for global equities. There were no clear defensive nor cyclical leadership themes, although financials and energy stocks (often considered “value” or “high beta” investments) performed well. Emerging market equities underperformed developed markets, with China leading the MSCI Emerging Markets Index lower (-0.8%) in local-currency terms. The Canadian equity market proved resilient; the S&P/TSX Composite gained 6.5% over the quarter.

Both bond and stock markets started 2022 poorly, with peak-to-trough declines of more than 10% having occurred in the major U.S. equity indices. There have been some disappointing earnings guidance from larger technology and communication bellwethers. Ongoing supply chain problems, labor shortages, and geopolitical tensions with oil producer Russia further ignited concerns about inflation and put additional pressure on central banks to get it right. There is optimism for the easing of some economic bottlenecks as pandemic mandates are being partially or entirely lifted in many parts of the world, but the longer-term impact of COVID policies on economies, markets, and social cohesion remain to be seen.