Market Commentary – First Quarter 2022

Both bond and stock markets started 2022 poorly, as investors began pricing in aggressive interest rate hikes in the face of rising inflation and slowing economic growth. As highlighted in previous commentaries, these trends were firmly in place towards the end of last year, but the military conflict in Europe has intensified price pressures and supply chain problems in energy and agriculture. As geopolitics takes center stage, many eyes are looking to China and to the potential impact of their policy decisions on global markets going forward.

In numerical terms, the MSCI All Country World Index declined 4.6%, but this loss hides some of the more acute pain felt by market participants in certain regions and sectors. The MSCI Emerging Markets Index declined 6.1% in the first quarter, but the Chinese component (MSCI China) dropped over 15% and has now lost over a third of its value in the past 12 months. Global technology shares, which rely on low interest rates to justify lofty valuations, have been amongst the hardest hit; disappointing earnings reports and guidance from several bellwethers in this space (Netflix and Amazon being notable examples) have added to the negative sentiment and have pushed share prices sharply lower.

Closer to home, the Canadian equity market benefited from its heavier weights in materials and energy. WTI crude oil closed the quarter at over US$100 per barrel and gold at over US$1940 per ounce, providing strong support for these equity sectors. Gold and gold miners have since pulled back as inflation-adjusted interest rates (real rates) are expected to climb. Overall, the S&P/TSX Composite Index overcame the halving of Canadian tech darling Shopify and posted a gain of 3.8% for the quarter.

Fixed income did not provide shelter from the equity storm to start the year. Rising rates and inflation pushed bond values sharply lower as well, with the broad FTSE Canada Universe Bond Index declining 7% for the three months ended March 31st. In the United States, the yield curve was invested at the end of March, with interest rates for the two-year government bond ending the quarter higher than the 10-year bond. Historically, inverted yield curves have been a harbinger of economic recession.

Private market investments, such as real estate and infrastructure, continue to see healthy institutional demand. Investment results have been strong, supporting the strategy of diversifying into such assets to address market and economic environments not seen for decades.

Central bank policy makers appear firmly committed to containing inflation through multiple interest rate hikes in the coming months, and in the Unites States, there has even been talk of a so-called reverse wealth effect as a desirable outcome (wanting asset prices to come down). Politicians appear firmly committed to war, economic sanctions, increasing protectionism, dubious fiscal policies, and general finger-pointing. It is becoming increasingly difficult to see a soft economic landing or smooth sailing for the capital markets in the months ahead.