The fourth quarter of 2022 started well for investors, with Canadian and U.S. stocks up over 10% in October and November, and bond prices rebounding. Disappointingly the rally faded in December. Despite a few good trading days, Canadian, U.S. and global equities dipped through December - dashing hopes for a positive close to Q4 - and ended 2022 down about 9%, 19% and 17% respectively.
There were some positive economic indicators: U.S. and Canadian house prices continued to drop, the job market held steady, and a CEO of a large shipping company was quoted saying supply chains are back to normal. Oil prices ended December with mild gains on optimism about China reopening and less Russian oil coming to market, so over the quarter oil was virtually unchanged and up for the year about 7%.
U.S. inflation slowed in December to 7.1%, down from 7.7% in November and a 2022 peak of 9.1% during the summer. This was the fifth straight month U.S. inflation fell, driven by cheaper gasoline, electricity, used cars and air travel. The Fed reacted with a smaller 0.5% rate raise after four consecutive 0.75% hikes, but did state that more hikes are still appropriate to return inflation to its 2% target. In Canada, inflation eased 0.1% in December to 6.8%, from 6.9% in November. In its CPI report, Statistics Canada observed lower gasoline prices were partially offset by climbing costs for mortgage, rent and food. The Bank of Canada increased its benchmark rate 0.50% to 4.25%. Bank Governor Tiff Macklem noted it will take time for higher rates to bring inflation under control, but monetary policy is starting to work.
We bring back the chart below as a reminder on the recovery that typically takes place after inflation normalizes:
It’s worth noting that equity markets are considered a leading indicator of our economy. In 2022 the markets have priced in for uncertainties, such as a recession or at the very least a slow down in economic activity. Despite various industries cutting back on hiring, overall unemployment is still near record lows. While demand for goods and services softened in 2022, overall, the long-term economic outlook looks positive. In a similar note, during a recession we tend to see markets recover as they start to price in the next economic cycle.
The chart below illustrates how markets tend to correct on average approximately 7 months in advance of a recession. On the positive, they tend to recover 6 months before the recession ends. Currently the debate is if we have seen a soft landing in the economy (a situation where the central bank slows down the economy due to raising rates before it fully enters a recession).
As difficult as 2022 has been with rate hikes, high inflation and market swings, the worst is now probably behind us, and the current market conditions create a much more compelling investing environment going forward. Central bank policy, which operates with a lag, is likely to weigh heavier on the economy into 2023, but equity valuations have normalized and the potential returns of several asset classes offer attractive opportunities. Corporate earnings in general have also remained resilient and supply chains are finally moving again.
The top line on the chart below on is a good reminder on the value of maintaining a long-term perspective when it comes to investing. As we zoom out from the short-term picture, we see that typically at the peak of bearish sentiment (the desire to cash out of the markets due to negative returns), is when we find ourselves around the market bottom.
Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing and stay focused on your long-term goals. This strategy helps you keep your emotions out of investing and avoid the investment trap of buying high and selling low. Ongoing monitoring and reviewing of your diversified portfolio can help to ensue your financial plan is appropriate for your goals.
We are here to support you in achieving your financial goals. If you require any assistance or have any questions please do not hesitate to reach out to Cliff, Mario, Mark, or our TSG team.