Happy New Year!
I wanted to provide a recap of 2021, what to expect in 2022, and contribution reminders for the RRSP and TFSA.
After a challenging 2020, the global economy stabilized and began its recovery in 2021 despite some challenges along the way. Most notably the COVID-19 delta variant in the spring, the omicron strain in the winter, stubbornly high inflation and supply chain disruptions. There was also ongoing uncertainty and discussion about when central banks would raise interest rates and wind down their pandemic stimulus. Despite these hurdles, we ended the year positively and in much better shape than when we started.
U.S, Canadian and global equity markets achieved a record-breaking year led by the energy sector, cyclicals, and some of the most speculative areas of the market. Markets then experienced their biggest dip for the year as the omicron variant struck before stabilizing in December.
Bond markets, which tend to move slower and in the opposite direction to equities were mixed. Central banks comments about ending their pandemic stimulus and raising rates soon to combat inflation was a contributor.
Real estate in Canada continued its record breaking trajectory with home prices reaching all-time highs. Whether the contributor was a tight supply of inventory, increased demand, cheap borrowing costs, Government liquidity pushed into the system, regulation constraints to build, or challenging labour markets due to lockdowns, it is anticipated prices will rise further in 2022.
U.S. inflation climbed to 6.8%, its highest level in 40 years. The Fed stated it expected inflation to begin cooling by the second half of 2022. It projected in late December the probability of three interest rates increases were coming. In addition, the Fed announced it will double the pace at which it winds down its pandemic stimulus, from US$15 billion to US$30 billion a month, placing it on track to complete the program in Q1 2022.
In Canada, inflation headed north as well (no pun intended), hitting 4.7%, its highest level since 2003. The Bank of Canada noted it could be ready to start raising interest rates as early as April 2022. It also announced it was ending its pandemic stimulus. In December, the bank’s five-year mandate was renewed by the federal government. This included a new measure, to consider the labour market when making interest rate decisions and use the flexibility of its 1-3% inflation target range to support employment if necessary.
What can we expect next?
The start of the new year has been met with broad weakness across stock indices as investors digested receding monetary and fiscal liquidity, persistent effects from COVID-19, and a rise—but potential eventual easing—in inflationary pressures. The areas undergoing the most intense selling pressure are the speculative areas of the market, which all gained incredible steam in 2020 and the early part of 2021. Even with new restrictions induced by the omicron variant, leading economic indicators still suggest positive momentum in advanced economies, likely due to the belief that the current Covid wave will be short-lived.
On the inflation side, the contribution of energy should fade, while investments in supply chain capacity should begin unclogging global bottlenecks in the second half of 2022. But don’t expect a whiplash to below 2% inflation: tight conditions in housing and labour markets should maintain inflation above target in the US and Canada in 2022.
In Canada, growth is especially sensitive to a slowdown in housing: residential investment currently makes up 9.2% of Canadian GDP, compared to 4.3% in the US and to a 2010-2020 average of 7.2%. Housing starts were still very solid in November, but anything more than a gentle decline in residential investment would threaten 2022 growth.
The expectation for 2022 is one of above-trend global growth and moderating inflation in the major advanced economies, leading to a gradual rise in central bank policy rates. There will be a flight to quality away from speculation, a compression of earnings, and best case scenario a more tempered single digit rate of return. This of course does not factor two potential risks, namely: (1) the entrenchment of persistent inflation due to continued supply shortages and shifting long-term inflation expectations, and (2) a slowdown in growth caused by policy tightening and/or virus uncertainty.
Regardless of where we are in the market cycle, it’s important to take a disciplined approach to investing. Maintaining a diversified mix of asset classes in your portfolio to maximize potential returns and minimize risk has served us well, and will continue to be the strategy moving forward.
2021 RRSP deadline and new 2022 TFSA room
March 1, 2022 is the deadline for 2021 RRSP contributions. The new year also brings an extra $6000 you can allocate to your TFSA.
Happy New Year!