Market Watch: December 2021

Global financial markets hit an all-time high in December as cases of Omicron coronavirus variant hit record levels worldwide. The absence of a significant increase in hospitalizations and Omicron appearing to boost immunity against the more severe Delta strain allowed stocks to rally until year-end. However, there are a lot of concerns going into 2022 that may halt the market’s run. As COVID-19 cases increase, firms cut back on services and hours as employees call in sick. Furthermore, last month, US CPI hit a nearly four-decade high, driving concerns about how much inflation the economy can tolerate and how this may influence business profitability. The Federal Reserve prepared the groundwork for a set of interest-rate hikes starting in the spring of next year.

The S&P/TSX Total Return Index was up 3.06 percent in December as Canada’s economy grew for a sixth consecutive month.

The Canadian GDP increased by 0.3 percent last month as the robust second-half bounce helped the GDP go back to pre-pandemic levels. However, some restrictions are reappearing because of the fast-spreading Omicron variant. Also, the Canadian job market outperformed forecasts in November, as the ending of income welfare schemes fueled new hiring. Employment increased by 153,700 in the previous month. This is more than triple the 37,500 increase predicted by analysts. As a result, the unemployment rate declined from 6.7 percent in October to 6 percent.

Moreover, The Canadian loonie rose by more than 1 percent after crude oil, key Canadian export prices surged more than 13 percent, and the Canadian economy showed signs of strength.

On monetary policy, the Bank of Canada kept its benchmark interest rate at 0.25 percent while maintaining its guidance that the first interest rate increase might come in April 2022. The central bank stated it is waiting until the economic slack is absorbed, citing devastating floods last month and Omicron as a potential impediment to economic activity. However, it has subsequently turned hawkish, warning that inflation would remain high for longer than predicted. Governor Tiff Macklem said that the slack in Canada’s economy created by the COVID-19 outbreak has significantly lessened. Therefore, the Bank of Canada may revise its projections at its January 26th meeting.

The S&P 500 Total Return Index ended up 4.48 percent in December as the US economy grew at an annual rate of 2.3 percent in the third quarter.

The US economy increased at a 2.3 percent annual rate in Q3, above an early forecast of 2.1 percent. However, it remained well behind the strong gains of 6.3 percent in Q1 and 6.7 percent in Q2 of this year. The GDP is expected to expand at its strongest rate in Q4, with some economists predicting a 7 percent rate. However, there are still challenges. Inflation and a drop in consumer confidence pose a danger to household consumption. Moreover, any rise in the continuing logistical delays and supply chain problems encountered in recent months might further stifle progress.

Furthermore, the economy added only 210,000 jobs in November, the smallest monthly increase in nearly a year and less than half of October’s 546,000 gain. Nonetheless, the unemployment rate fell from 4.6 percent to 4.2 percent last month. This is the lowest unemployment level since the pandemic began, even as employers appeared to slow hiring. However, this is a historically low level, and it is still higher than the pre-pandemic unemployment rate of 3.5 percent.

Regarding monetary policy, the Fed is taking a stricter stance on inflation after consumer prices rose 6.8 annual percent in November, the most significant increase in almost four decades. With inflation forecast to continue high for some time, the Fed is expected to raise interest rates soon after the end of its bond-buying program in March. Fed officials’ quarterly predictions also indicated the possibility of three interest rate rises next year. Further, the Fed said in November that it would lower its $120 billion-per-month bond-buying program by $15 billion each month. However, November’s inflation figures, which showed prices growing at a rate not seen since 1982, raised pressure on central bank authorities to act further. As a result, beginning in January, the stimulus will be lowered by $30 billion every month.

The MSCI ACWI Ex-US Total Return Index finished up 4.16 percent in December as Omicron worries have calmed down and the market outlook has improved.

The European economy is on pace to develop faster than expected. However, given the uncertainties regarding the Omicron variant, inflationary pressures, and supply chain obstacles, the path to recovery remains unclear. The EU and the eurozone are predicted to reach 5 percent GDP by the end of 2021. This is slightly higher than the prior estimate of 4.8 percent. The economy is expected to increase by 4.3 percent in 2022. However, this expansion is not uniform across the EU. In the end, it all depends on how the COVID-19 pandemic unfolds. Markets have been shocked by the increase in cases with the Omicron variant, and additional government controls may impact economic activity. On the other hand, businesses are in danger of increased shortages and supply chain disruptions.

The ECB kept its interest rate unchanged. The central bank sees inflation as driven mainly by high energy prices. As a result, Christine Lagarde believes it is unlikely to rise higher in the following year. Nevertheless, the ECB said it would conclude its pandemic-era bond-buying program in March. Still, it would try to smooth the transition by offering more support for the eurozone economy in the next year. Bond purchases under its 1.85 trillion-euro ($2.19 trillion) Pandemic Emergency Purchase Program (PEPP), which is set to expire in March 2022, will be reduced as the program ends. Two other leading central banks have adopted a different strategy. The Bank of England decided to increase its interest rate by 15 basis points to 0.25 percent. In addition, the Fed suggested that it will stop its pandemic-era asset purchases in March and hike interest rates three times next year.

The Portfolio Management Team