Fourth Quarter
Global equity markets had a nice bounce in the fourth quarter, but not enough to offset the severe setbacks experienced in the previous quarters. The economic backdrop of the last twelve months of surging inflation, rising interest rates, slower economic growth, deteriorating credit conditions and increasing risks of a global recession set the tone for a difficult year for equity investors. Furthermore, the persisting conflict in Europe continued to add to this uncertainty. This was reflected in global equity markets’ returns with all, except for the FTSE 100, ending the year in negative territory. The S&P/TSX Canadian index gained 5.1 % in the last three months, but it was still down 8.7% in 2022. In the US, the S&P 500 index jumped 7.1% in the fourth quarter but still declined 19.4% in US $ since January. The Nasdaq index was down the most, shedding 33.1%.
As largely reflected by the Nasdaq index, the technology sector was one of the most negatively impacted by rising interest rates and slower economic growth. Companies saw their valuations compressed significantly. Also hit in the US was the Consumer Discretionary and the Telecom sectors. Here in Canada, the healthcare sector, mostly comprised of biotech and cannabis stocks trailed the most. On the other hand, the energy sector continued to soar and was by far the best performing sector in Canada and in the US.
On the fixed income side, both the Bank of Canada (BoC) and the Federal Reserve (Fed) continued to raise interest rates in the fourth quarter in their fight against inflation. The yield curve is now inverted with higher short-term rates than longer term rates. This year’s cumulative rate increase was 400 bps (4%) for the Bank of Canada and 425 bps (4.25%) for the Federal Reserve, one of the fastest increases on record. As interest rates rose, bond prices declined. Hence, total returns for bonds in the last twelve months have been some of the weakest ever experienced in a year with low double digit negative returns for the Canadian Bond Universe. Although not completely immune from this set back, our clients have been largely insulated from this severe downturn as our bond component is short in duration and mostly comprised of GICs and high credit quality short term corporate bonds.
The Model Portfolio performance on an absolute basis was slightly negative in 2022, down 1.7%, but its performance on a relative basis was extremely strong. Our equity portfolio handily beat the blended S&P/TSX and S&P 500 benchmarks. As we head into 2023, we remain confident with the quality of our current equity holdings. Balance sheets for the companies we have invested in are healthy and can traverse a slower economic cycle.
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Investment Checklist
1. Make 2023 RRSP contribution as soon as funds are available. The maximum is 18% of 2022’s earned income to a maximum of $30,780.
2. Make 2023 $6,500 TFSA contribution as soon as funds are available. The maximum if you have never contributed is $88,000.
3. Make $2,500 annual RESP contribution per child to benefit from the 30% combined government grants.
4. Review asset allocation to make sure it is in line with current objectives and risk tolerance and inform us of any special income need for this year.
The calculation of performance data set forth herein has been prepared by the author as of the date hereof and is subject to change without notice. The author makes every effort to ensure that the contents have been compiled or derived from sources believed to be reliable and contain information and opinions, which are accurate and complete. However, BMO Nesbitt Burns Inc. ("BMO NBI”) makes no representation or warranty, express or implied, in respect thereof, takes no responsibility for any errors and omissions which may be contained herein and accepts no liability whatsoever for any loss arising from any use of or reliance on this report or its contents. Information may be available to BMO NBI or its affiliates that is not reflected herein. This report is prepared solely for information purposes. Please note that past performance is not necessarily an indicator of future performance. The indicated rates of return are gross of fees or commissions. Individual results of clients' portfolios may differ from that of the model portfolio as fees may differ, and performance of specific accounts is based on specific account investiture. The noted model portfolio portfolio may not be appropriate for all investors
11 Sources: Bank of Canada, Bloomberg, BMO Capital Markets