It’s been a challenging year so far for investors. There hasn’t been just one theme that has contributed to the weak performance to start the year but many. At the start of 2022, the conversations were around ‘what is the pace in which global central banks’ would increase interest rates. This has transitioned into the impact of the Russia-Ukraine war and now has moved on to ‘whether the odds of a recession have increased.’
As well as continued concerns about inflation and still some supply chain issues. All of the uncertainty contributes to volatility.
How did stocks do this quarter?
- The S&P 500 (US market) ended the quarter at -4.9% although at one point was down -12.5%. The MSCI Europe and MSCI EAFE (Europe, Asia, Far East) also struggled, with returns of -5.9% and -6.6% respectively.
- The Canadian market (S&P/TSX) fared better, ending with a gain of 3.1% mainly on the back of stronger oil and commodity prices.
Bonds are also struggling as they are tied to interest rates. But they are good to hold for diversification and protection.
Here is some commentary from Manulife’s chief Investment team:
As the year progresses, we continue to believe that the Fed will raise interest rates less than the 6,7,8 times that’s currently being priced in and that Russia-Ukraine tensions will eventually ease, leading to a pivot in the negative narrative that has unfolded since the start of the year. Over the next few months, the geopolitical premium built into oil prices today will likely begin to decline, but supply-and-demand dynamics will continue to support oil prices above US$90 a barrel as global economies continue to fully reopen leading into the summer and production remains limited.
A change toward a less hawkish sentiment coupled with a good (although weaker) fundamental backdrop provides a positive path forward for equity returns. The key to success in investing is to stay focused on what matters and understand the environment so that you can adjust to the changes if necessary.
With regard to a recession, economic growth forecasts have been revising lowered but are still expected to be 4% growth over the next year. Dynamic’s chief Investment Strategist Myles Zylock doesn’t see imminent risk in the next 12 to 18 months. His comments include that there is a movement towards more quality companies i.e. those with continued profitability, reliability of their cash flows, and a strong balance sheet i.e. more assets than debt.
Historically the impact of war on equities is temporary. Investing is a long game, so best to stay the course and remain diversified. You win by preparing and not reacting.
Please let me know if you’d like to talk further.