U.S. equities rose in the final quarter of 2021 during which fears over rising cases of a new COVID-19 variant weighed on investors. These worries were put on hold in December as the S&P 500 rallied to finish up 11.0% for Q4. This gain helped the index finish with a 28.7% return for 2021. Sector leadership in Q4 was found in Real Estate, Information Technology and Materials while Communications, Financials, and Energy were the laggards. Real Estate was also the second-best performing sector for 2021 behind Energy. Overall, the economy remains stable with robust corporate earnings. The unemployment rate is now at its lowest level since February 2020 although the participation rate is not yet back to pre-pandemic levels. Small-cap and value stocks lagged their large-cap and growth counterparts in Q4. The Canadian Dollar strengthened slightly versus the U.S. dollar during the quarter by 0.8%.1
S&P/TSX Composite Index was up 5.7% over the quarter. Nine of the benchmark’s underlying sectors were positive during the quarter, led by Materials and Real Estate, with gains of 10.2% and 8.5%, respectively. The health care sector was the main detractor for the quarter, with a decline of 18.4%. International stocks, as measured by the MSCI EAFE Index, advanced 2.1% during the quarter, while Emerging markets faced losses of 2.0%. Emerging markets were particularly bogged down by a swift selloff in Chinese equities. The Chinese index lost another 5.0% in September after one of China’s leading real estate developers, Evergrande Group, failed to make two of its bond payments on time at the tail-end of the third quarter.
Canadian investment grade bonds, as measured by the FTSE Canada Universe Bond Index, increased by 1.5% during the quarter, while the key global investment grade bond benchmark fell by 0.7%.
A new coronavirus variant, problematically high inflation, supply-chain challenges and China’s property-market slowdown are among the main headwinds facing the global economy. As the recovery progresses and economies reach their potential, it is natural for growth to decrease. The economic recovery is transitioning into a new phase. It no longer seems necessary for policy makers to be providing such a powerful lifeline to economic growth. Central banks will continue to slowly remove accommodation. Omicron is a risk, not only for growth but for potential inflation. Given the magnitude of the surge in global case counts, we are pleasantly surprised by how well the economy, at least so far, has managed to navigate this latest wave. Equities enter the year on a solid footing. Earnings continue to trend higher with the support of healthy consumer and capital spending activity. Stocks are expensive, but an environment of low interest rates, and where inflation could transition back to normal levels the equity market could continue its current path barring a black swan event or a policy error.
Bonds look unattractive given current conditions. Not only is the global economy growing, but inflation risk remains at the forefront of the current macro environment and central banks are now looking to tighten. The focus remains on equities in multi-asset portfolios.
Our Asset Allocation: The elevated valuations seen in both equity and bond markets leave each of these traditional asset classes susceptible to disappointment. This has hardened our view on the importance of allocating a material portion of a multi-asset portfolio to those assets which can generate alternative return streams. These can include real return and long-short strategies, private equity or derivative strategies.
Strong earnings growth, low rates and the added push from policy stimulus comprised much of the force behind last year’s surge in share prices. A big year for the market like 2021 does not necessarily lead to a poor follow up year. The average return after a greater than 25% return year has been 14%, with almost 80% of all the years in the positive.
The long-term track record for the stock market has been impressive with about 73% of the years since 1871 generating a positive return. The performance for the other major developed markets has paled in comparison to the return of the S&P 500, with the closest major markets, the Nikkei and the TSX, trailing by a total of between 270% and 330% respectively.2 We remain optimistic these odds persist into the future.
Thank you for your continued trust in us. We’re always watching and thinking about your investments with the appropriate level of diligence, commitment, and care.
Penmore Wealth Management
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.
- Monthly Market Snapshot iA Private Wealth (Jan 2022 edition)
- Dynamic Funds-The Investment Junction (Jan 2022)
Roland Orban, CIM, PFP, Investment Advisor
304-3301 Langstaff Rd, Concord, ON L4K0C5
T: 905-669-5577 Ext. 230 | TF: 1-866-229-2212 | F: 905-669-5738
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