Market Commentary – Fourth Quarter 2022

Financial markets faced uncertainty about future monetary policy in the fourth quarter. Signs of peaking inflation, along with market expectations for a downward shift in the pace of monetary tightening, boosted investor sentiment and led to widespread gains across asset classes in the first two months of the quarter. Positive sentiment reversed in December in response to – paradoxically – persistently strong employment data. Moreover, aggressive rhetoric and tightening actions from central banks globally pointed to the potential for further interest rate increases.

The performance of commodities was mixed during the fourth quarter and, despite volatility in crude oil prices that was driven by developments at the Organization of the Petroleum Exporting Countries and news out of China regarding easing lockdown restrictions, West Texas Intermediate oil ended the quarter nearly unchanged at $80 USD per barrel. In November, turmoil within the cryptocurrency space surfaced with the bankruptcy of one of the largest cryptocurrency exchanges, but any panic appeared contained and did not spread to other assets.

Despite weakness in December, the MSCI All Country World Index rose 7.5% (in local-currency terms) over the quarter. Emerging markets equities also posted positive returns, but underperformed their developed market peers, with the MSCI Emerging Markets Index rising 6.7% (in local-currency terms). In Canada, the benchmark index rose 6.0%, with cyclical sectors outperforming more defensive sectors.

The Bank of Canada and the U.S. Federal Reserve raised their target interest rates by a total of 100 basis points (bps) and 125 bps, respectively, during the quarter. Two-year yields in both countries increased more than 10-year yields, further inverting the yield curve and foreshadowing a recession. The FTSE Canada Universe Bond Index increased 0.10% over the fourth quarter, while the FTSE Canada All Corporate Bond Index increased by 1.0%.

Private market assets such as real estate held up remarkably well for the first three quarters of the year, even producing sizable positive returns. However, valuations started playing catch-up to the downside in the fourth quarter, primarily due to a reassessment of the office sector to reflect lower occupancy in a post-COVID environment.

2022 will be remembered for inflation levels not seen in over 40 years, and the monetary tightening that resulted in a rare coincidental sell off in both the equity and bonds markets. Into 2023, markets continue to trade on the perverse “good news is bad news” mantra, fearful that stronger economic data will not deliver a return to easy monetary policy the markets so clearly crave.