Since the start of the year, investors and consumers have been growing increasingly pessimistic about the outlook for the economy, and in the past quarter we have started to see concrete evidence that the economy is indeed slowing. U.S. retail sales, on a real or after-inflation basis, are now contracting compared with a year ago, and declining consumer spending is atypical outside of recessions. Rising borrowing costs are also posing a headwind to the economy but could be especially problematic for the interest-rate-sensitive real estate market where home sales have been falling for almost a year and at an accelerating pace since the start of 2022. US economic data was mixed with inflation surpassing expectations, employment prints largely in line with expectations, while GDP weakened towards the end of the quarter.
The U.S. benchmark suffered its steepest percentage drop at the halfway point since 1970. Investors were equally hard pressed to find money making opportunities at a sector level. Technology, Consumer Discretionary, Communication Services, and Industrials all declined by more than the 20.9% recorded by the benchmark. Ten of the eleven sectors were down in the first half of 2022. That’s tough. Energy was the only sector in the green, generating a first-half return of 12.5%. The first half of 2022 exemplifies a scarcity of return opportunity. Unless one had held the lion’s share of an equity portfolio in Energy, the last six months truly identifies with a difficult investment environment. To place this into perspective, Energy today comprises roughly 5.2% of the US equity benchmark.1
Canadian equities, as measured by the S&P/TSX Composite Index declined by 13.2% over the quarter. All sectors within the Canadian equity index declined with the smallest sector, Health Care, declining the most by 49.6% and the second-largest sector, Energy, declining the least by 1.9%.
Global equities markets, as represented by the MSCI World Index, retreated by 16.32% during the quarter. The CBOE Volatility Index, a gauge of the market’s future volatility expectation, returned 39.6%.2
Global bond markets experienced a total return decay of 13.9% in the year’s first six months, or the worst half-year performance since at least 1990 when the global aggregate bond benchmark came to be. This slide was the continuation of a bond bear market which began in January 2021 and has since erased a record 19.6% from market value. The Canadian and US 10-year benchmark bond yields moved higher through the period, with the US benchmark 10-year bond yield and Canadian benchmark bond yield ending close to 3.0% and 3.2%, respectively.
The Goldman Sachs Commodity Index’s strong first half performance can be attributed to depressed inventories, ongoing global growth, and supply chain disruptions. Energy was the lead performer, with crude oil and natural gas prices up by more than 40% as the first half ended. Agricultural commodities such as wheat, orange juice, and hogs rallying by between 15% and 26%.3
While central banks are clearly motivated to raise interest rates rapidly in the near term, what’s likely most important for investors is the level at which rates settle over the longer term – i.e., the terminal rate. Interestingly, market pricing suggests that the fed funds rate will top out in early 2023 and eventually decline to around 3.0%, a long-term expectation that has been relatively stable over the past several months. That said, market pricing can adjust meaningfully as we have seen so far this year, and the ultimate course for interest rates will depend on whether inflation comes down fast enough to reduce the need for further aggressive tightening.
Over the past 25 years, investors grew accustomed to the idea that bonds would rally as stocks declined and vice versa. That was not the case during the first half of 2022. Stocks fell, bonds dropped, and even precious metals modestly declined in value. The only asset that saved the portfolio was commodities and even within that asset grouping it was largely energy and select agricultural commodities that managed to gain ground. This historically unusual dynamic began as an inflation shock that transformed into an interest rate shock. It’s been an incredibly difficult first half of 2022 for investors, however, to succeed one must remain optimistic.
This information has been prepared by Roland Orban who is a Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
- Dynamic Funds-The Investment Junction (July 2022)
- Dynamic Funds-The Investment Junction (July 2022)
Roland Orban, CIM, PFP, Investment Advisor
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