At the close of business on Friday, US and Japanese equities continued their decline while Canada improved marginally. Emerging markets continued to improve while Europe remained flat. Rising real yields have presented a headwind for equities so far in 2022.
The yield on the US 10-year Treasury note stabilized on the week after brushing the 1.80% level and now trades at 1.793%. The price of a barrel of West Texas Intermediate crude oil rose to $82.65 from $79.15 last week while volatility, as measured by the Cboe Volatility Index (VIX), declined to 19.19 from 19.6 last week.
We are well underway with our annual review meetings. In our opinion, we remain in the mid-cycle of a bull market and we are forecasting solid returns for 2022. However, this year we will probably see increased volatility with central banks in the US and Canada increasing interest rates. We are expecting four interest rate increases in 2022 by the fall of this year. We also expect stronger returns from international equities and emerging markets this year.
Following the pattern established in South Africa, the Omicron variant of the coronavirus appears to have peaked in both New York and London, with the number of new cases declining sharply in recent days. While hospitalizations have risen sharply recently, the seven-day moving average of deaths is not accelerating. If this trend continues and we don’t see another variant emerge, it may very well mark the transition from a pandemic mindset to one of managing this virus and the beginnings of a more normal life for many of us in 2022.
CANADIAN ECONOMIC NEWS
As of yesterday, Ottawa’s vaccine mandate for truckers who cross into Canada from the United States started. We believe the new requirement could cause bottlenecks and potential price hikes for the flow of goods coming across the border. We will continue to watch this development.
US ECONOMIC NEWS
The US Consumer Price Index rose 7% year over year in December, the fastest pace since June 1982. Price gains remained broad-based, with autos and housing among the key contributors to the rise. December marked the third month in a row that inflation exceeded 6%. In his confirmation hearing before the Senate Banking Committee on Tuesday, US Federal Reserve Chair Jerome Powell calmed markets, expressing resolve on the fight against inflation without appearing panicked. He said that the Fed will work to make sure that inflation does not take root in the economy, and stated that prices will probably peak in mid-2022.
In a conversation with one of our clients this past week, he reminded me that if you look at an index chart for the S&P 500 it confirms that despite market volatility it is easy to see that the US has always been a great place to have your money invested. I totally agree with his point. Even though US equities are among the most expensive globally, this recent sell off has created very attractive buying opportunities within the US market.
EUROPEAN ECONOMIC NEWS
I have often been asked if we are concerned about the threat of Russia invading the Ukraine. One thing that we know for sure is that neither side wants a nuclear war. Talks between Russia, the US and NATO continue. Russia is seeking assurances from the US and NATO that Ukraine will not be admitted as a member of the alliance and that missiles will not be based there.
In the event Russia invades Ukraine, sweeping US sanctions against top Russian officials and the country’s banks are expected to be imposed. We will continue to follow this situation. However, it is important to note that in my forty-plus years in this business, there has been a war going on somewhere in the world every year and the markets have continued to grow.
JAPAN, CHINA NS EMERGING MARKETS ECONOMIC NEWS
Emerging markets are showing solid performance at the start of this year. When you think of emerging markets, you must have a focus on China. China’s trade surplus reached a record $94.5 billion in December, but officials expect it to slip in the future as demand for medical supplies and work-from-home equipment is likely to slow in 2022.
Chinese officials announced plans to accelerate work on over one hundred major infrastructure projects in a bid to keep the country’s growth rate above 5%. The move is designed to offset the economic drag from declining housing investment and still sluggish household demand. Among the areas targeted for investment include 5G telecom, renewable energy, transportation and social housing.