01 April, 2022

Weekly Update - Canada’s S&P/TSX leads global markets in Q1

The Canadian stock market continues to outperform its U.S. and global counterparts through the first three months of the year as the S&P/TSX finished up 3.8%, while the U.S. S&P 500 was off -5.6% and the MSCI World Index finished down -6.1%, all in Canadian dollar terms.

 

A hard rally by commodities, including oil, since the Russian invasion of Ukraine was supportive of the Canadian market, which is loaded with resource firms, while the U.S. market, in particular, has many large-cap, growth-oriented companies that were hit hard by the specter of rising interest rates.

 

Investors who piled into commodities fared best, riding massive gains in everything from oil to nickel and wheat. Yet, the increases have exacerbated inflation concerns and will likely lead to a sharper response from central banks.

 

Bond markets have endured significant losses in the first quarter and suffered through heightened volatility. More broadly, uncertainty is brimming across all markets with inflation running high, an inverted yield curve which often foreshadows an economic slowdown in the future, and the ongoing conflict in Ukraine.

 

The good news on the economic front is that Canada’s economy extended a streak of monthly gains to nine in February amid three-decade high inflation, however this reinforces views that the Bank of Canada is poised to embark on one of its most aggressive hiking cycles yet, raising interest rates which will increase the cost of borrowing for governments, corporations, and households.

 

Bank of Canada officials led by Governor Tiff Macklem began a rate hiking cycle with 25 basis points in early March in an attempt to bring inflation back under control. Some economists now expect the resilient economy -- with strong consumption trends, a robust job market and broadening price pressures -- will push policymakers to shift to a more hawkish stance, with some forecasting a 50-basis-point hike at each of the Bank’s next three decisions.

 

As markets continue to react and adjust to changing conditions, a continued focus on your long-term goals remains the best course of action. Investing through a well-diversified portfolio has historically provided the best experience through a combination of goals-based returns and reduced volatility over time.

 

  • Short-Term View: Canadian stocks reached another new record during the week, while U.S. stocks have rallied to within 4% of their all-time highs. Sentiment still wavers day-to-day, however, on headline news.
  • Longer-Term Thinking: Sticking to your long-term plan through periods of volatility is central to investment success.
  • Logic Over Emotion: Perspective is key. Focus on long-term goals and timeframes.

Our Experts Say...

 

“Distributors are often beneficiaries in an inflationary environment. If they can maintain their margins —usually fairly easy for them to do, to pass along price increases — multiplied by a higher price, it's just more earnings for them.”

 

Jim Hall, Chairman,

Mawer Investment Management

International Growth Investment Specialist

 

 

Over the past 10 years, markets are positive. Perspective is key. Markets do react to short-term increases in volatility – see the grey lines below – but the long-term trend is upward in the blue and red lines.

 

Source: Morningstar Direct. Growth of $100,000 shown. Total returns from Jan. 13, 2012 to Mar. 31, 2022 in local currency. Volatility is illustrated by the rolling 5-day minimum and maximum percentage change for each of the indices shown.