Skip to main content

January 2022 monthly market insights

January 2022 monthly market insights

Data and opinions as of December 31, 2021

Stocks rise on seasonality; central banks send policy signals


Equities rose to another all-time high on the back of a customary December “Santa Claus” rally. The Omicron variant of COVID-19 had initially generated some market volatility, but equities recovered amid low volume over the holidays. In fact, the S&P 500 Index hit its 70th all-time high for 2021 and the S&P 500 Index returned an impressive 27.6% for the year, in Canadian-dollar terms. The final month of 2021 was also characterized by central bank actions. Market attention was focused on the various major central bank meetings that occurred in December as markets sought a clearer picture on the path of rate hikes to come. The Bank of Canada renewed its inflation mandate with an increased focus on maximum employment, and the U.S. Federal Reserve announced a faster pace of asset purchase tapering.

The NEI perspective


Stocks make customary holiday gains. Pandemic concerns generated some market volatility, but equities recovered amid low volume over the holidays. Stocks rose to another all-time high on the back of a “Santa Claus” rally.

Global responses to Omicron. The rapid spread of the Omicron variant of COVID-19 led to governments across the world reintroducing restrictions. Booster shots are being pushed by various governments as a means to contain the outbreak.

Eyes on policy moves at 2021’s end. Market attention at the end of last year was focused on various central bank meetings as markets look to better understand the path of future rate hikes. Despite Omicron, central banks are pushing on with tightening policy as inflation remains elevated and the labour market tightens.

From NEI’s Monthly Market Monitor for January. 

Equity

% return in C$

Bar graph showing % return in CAD (C$) for equity. Canada monthly return is 3.1% and YTD is 24.9%. US monthly return is 2.3% and YTD is 25.4%. International markets monthly return is 3.5% and YTD is 10.3%. Emerging markets monthly return is 0.3% and YTD is -3.4%

Canada: MSCI Canada; U.S.: MSCI USA; International markets: MSCI EAFE; Emerging markets: MSCI Emerging Markets. Source: Morningstar Direct

Fixed income and currency 

% return in C$ 

Bar graph showing % return in CAD (C$) for fixed income and currency. Canada investment grade monthly return is 1.7% and YTD is -2.6%. Global investment grade monthly return is -0.4% and YTD is -1.4%. US high yield monthly return is 1.8% and YTD is 5.1%. US$ vs C$ monthly return is -1.5% and YTD is -0.9%

Canada investment grade: Bloomberg Barclays Canada Aggregate; Global investment grade: Bloomberg Barclays Global Aggregate; U.S. high yield: Bloomberg Barclays U.S. High Yield. Source: Morningstar Direct.


The market impact of central banks and interest rates


On November 3, 2021, the U.S. Federal Reserve first announced plans to taper its bond purchases. Just a month later at its December 15 meeting, the Fed doubled the pace of tapering. Under this framework, asset purchases will end by the first quarter of 2022, setting the stage for the first rate hike as soon as the second quarter of 2022. Market pricing implies there will be three rate hikes in the upcoming year. But what does this mean for your investments and for markets overall?

Central banks (e.g., the U.S. Federal Reserve, Bank of Canada, Bank of England, and European Central Bank) are primarily responsible for monetary policy and money supply in an economy. They control this money supply by influencing the short-term rate (e.g., the Federal Funds Rate in the U.S.), which is the interest rate that banks charge when lending money to one another. As central banks raise rates, borrowing money becomes more expensive, and this translates to higher interest rates on loans to consumers (e.g., mortgages, credit card debt, car loans). This is known as “tightening” in credit markets. Higher interest rates slow economic growth as consumers are discouraged from spending, with loans for big ticket items becoming more expensive and higher interest rates encouraging saving.

Higher rates are can also impact stock market valuations. Higher interest rates encourage investors to allocate more assets to bond investments. Furthermore, the intrinsic value of a given stock can be negatively impacted as well. Simply put, the value of a stock is the present value of future expected cash flows. As the interest rate used to discount cash flows increases, the value of future earnings diminishes. However, this doesn’t have an equal effect on all sectors. The present value of cash flows for high-growth companies in which future earnings are much higher than they are today generally will be hit harder than companies with low growth rates. That is why the tech-heavy Nasdaq index often falls more than a more blue-chip index like the Dow Jones Industrial Average when rates increase.

Finally, given the indirect effect of rate hikes on financial markets, central banks typically only hike rates at a time when the economy itself is strong and businesses are doing well. In fact, regional market indices may not actually experience a correction as a result of rate increases. Central banks seek to find a balance, where interest rates rise enough to curb spending but not to a degree where the economy would not be able to grow. This balance is not easy to find, and in some cases central banks hike too much and start an economic contraction. For example, the following graph illustrates the impact of prior Fed rate hikes on the S&P 500 Index over a three-year period.



Fed rate hikes do not always have a cooling effect on U.S. stocks


Graph illustrating the impact of prior Federal rate hikes on the S&P 500 from October 2016 to October 2018. The following rate hikes are highlighted: December 17, 2016, March 16, 2017, June 16, 2017, December 15, 2017, March 22, 2018, June 14, 2018, September 27, 2018 and December 20, 2018

Source: Bloomberg, S&P 500 Index, as of Dec. 31, 2021.


Meridian logo

Aviso Wealth logo

Legal

Aviso Wealth Inc. (“Aviso Wealth”) is the parent company of Credential Qtrade Securities Inc. (“CQSI”), Credential Asset Management (“CAM”), Qtrade Asset Management (“QAM”) and Northwest & Ethical Investments L.P. (“NEI”). NEI Investments is a registered trademark of NEI. Any use by CQSI, CAM, QAM or NEI of an Aviso Wealth trade name or trademark is made with the consent and/or license of Aviso Wealth. Aviso Wealth is a wholly-owned subsidiary of Aviso Wealth Limited Partnership, which in turn is owned 50% by Desjardins Financial Holdings Inc. and 50% by a limited partnership owned by the five Provincial Credit Union Centrals and the CUMIS Group Limited. 

This material is for informational and educational purposes and it is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. This document is published by CQSI, CAM and QAM and unless indicated otherwise, all views expressed in this document are those of CQSI, CAM and QAM. The views expressed herein are subject to change without notice as markets change over time. Views expressed regarding a particular industry or market sector should not be considered an indication of trading intent of any funds managed by NEI Investments. Forward-looking statements are not guaranteed of future performance and risks and uncertainties often cause actual results to differ materially from forward-looking information or expectations. Do not place undue reliance on forward-looking information. Mutual funds are offered through Credential Asset Management Inc. Mutual funds and other securities are offered through Credential Qtrade Securities Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated. 

The MSCI information may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used as a basis for or a component of any financial instruments or products or indices. None of the MSCI information is intended to constitute investment advice or a recommendation to make (or refrain from making) any kind of investment decision and may not be relied on as such. Historical data and analysis should not be taken as an indication or guarantee of any future performance, analysis, forecast or prediction. The MSSCI information is provided on an “as is” basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to computing, computing or creating any MCI information (collectively, the “MSCI Parties”) expressly disclaims all warranties (including, without limitation, any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.