Market volatility is upon us
The two-year-old COVID-19 pandemic has left its mark on all of us, our households, the corporate sector, and the economy, all of which have had to adapt to new and challenging circumstances.
The massive stimulus that we witnessed in 2020 and 2021 continues to be reduced by central banks and governments. The market is paying more attention today on the timing and pace of interest rate increases, both in Canada and the U.S. We anticipate seeing the first of several rate hikes to begin in the next few months.
Tensions, which have existed between Russia and the Ukraine for years, have escalated in dramatic fashion this week - Russia put an end to the speculation and has invaded the Ukraine. Uncertainty around this conflict, as well as the anticipation of higher interest rates, has increased market volatility in recent weeks. While we must not discount the personal impact of those living in that region, previous geopolitical events like this have had a limited impact on global markets after the initial bout of volatility. We have been, and will be, closely monitoring this situation.
Interest rates, which have been abnormally low for the past few years, combined with the large amount of government stimulus deployed to keep economies afloat during lockdowns, has resulted in a strong economic rebound. Now that the economy has its footing, we will see interest rates increase back towards historically average levels and a continued reduction in government stimulus.
Most notable in recent headlines is the rate of inflation in Canada and globally. Inflationary pressures have certainly been seen in many goods due to elevated demand and constrained supply chains. We’ve all noticed increased prices on everything from gas, to groceries and housing. On a broad basis, however, we are starting to see a more normal rate of inflation in most areas of the economy, suggesting that the underlying trend to overall inflation is not as extreme as many headlines currently suggest. By 2023, we anticipate headline inflation to return to rates more in line with pre-pandemic levels.
The Team has had an active beginning to the year. In January, we attended our firm’s equity conference which focuses on the outlook and health of the global economy and markets. The conference provided our team with an opportunity to meet with market strategists and analysts to drill down on industry themes and to assess where we see opportunities and risks in 2022. As a result, your portfolio was rebalanced to help protect against the short term volatility we had anticipated – we took profits on holdings that have performed well and have added new holdings in sectors that we feel are well positioned for the period ahead.
For 2022, we expect that the global economy will continue to grow, however, at a slower pace than we have seen recently. Market volatility will continue in the coming months as we transition to higher interest rates, and the events between Russia and the Ukraine unfold, though we still expect positive market performance for the year albeit at a more moderate pace than last year.