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What a difference three months can make. The first quarter of 2022 was a stark contrast to the way markets ended 2021. Many equity indices went through a correction, bond yields climbed sharply (meaning bond prices fell), while central banks began raising rates.
Perhaps the most shocking event in the quarter was the invasion of Ukraine by Russia, which is first and foremost a humanitarian tragedy. The devastation by Russia against Ukraine was also a key catalyst to the volatility in equity, fixed income and commodity markets.
Despite this weaker start to the year, the equity outlook for the rest of 2022 has improved. Equity valuations are more attractive following the first quarter decline. Corrections are a part of a normal functioning equity market. While uncomfortable, corrections outside of a recession have historically presented an attractive entry point for investors.
The S&P/TSX Composite Index advanced during the quarter largely due to the energy sector. The price of crude gained 33% during the quarter, owing to tighter global supply and geo-political risk. The information technology sector lagged as tech stocks were weighed down by the rising rate environment.
Excluding the bear market of 2020, the S&P 500 Index suffered its first correction since 2018. Despite being down as much as -13% during the quarter, the S&P 500 Index managed to regain more than half the losses by quarter end. Not surprisingly, the most expensive stocks were the hardest hit. The NASDAQ Composite Index saw greater downside by as much as -21% with the higher valuation tech stocks being marked down in the face of higher interest rates. By the end of the quarter only the energy and industrials sectors managed gains.
International equity markets fell during the quarter, on weaker growth in China and the increased risk and disruptions from the war in Ukraine. Weaker Chinese stock performance, in part due to the partial lockdown of Shanghai, weighed on the emerging market index. Europe, with its reliance on Ukraine and Russia for its energy imports, was negatively impacted by the war.
Bond markets were down during the quarter as higher inflation drove yields higher along with central bank expectations. Canadian, and global fixed income benchmarks were down sharply as yields rose. U.S. high yield and investment grade corporate bonds fell as well during the quarter. The Bank of Canada, U.S. Federal Reserve and Bank of England each raised their respective benchmark rate during the quarter, while signalling a series of increases for 2022 in a bid to tamp down inflation.
For the remainder of 2022, growth is very likely to moderate from the rapid pace of 2021 to a more normalized environment. North America shows decent economic momentum within the manufacturing, housing and labour markets. But Europe is at risk of a recession stemming from the Ukraine war, while China’s lock downs have slowed growth.
Yet overall, aside from the uncertainty of geo-political risk, the outlook for the remainder of 2022 looks promising.