Market Update*

An uphill start to 2022: War in Ukraine and Fed rate tightening

The first few months of 2022 have been rough for investors. Global markets are down nearly 10% in Q1 and the S&P 500 Index entered correction territory in February. Two major events have put additional pressure on markets: War in Ukraine and the U.S. Central Bank Policy. The S&P 500 ended the quarter at -4.9% and the MSCI Europe and MSCI EAFE also struggled, with returns of -5.9% and -6.6% respectively. The S&P/TSX fared better, ending with a gain of 3.1%.

Ukraine-Russia conflict—what you should know

Global stocks fell last Thursday morning (February 24, 2022) while bonds and oil rose as Russian President Vladimir Putin ordered a military attack on Ukraine, raising tensions in an area that was already on edge. Major European indices (FTSE 100, CAC 40, and DAX) closed down nearly 4% while, as of time of writing, markets in North America recovered nearly 1% from the lows of the day—the S&P 500 Index and S&P/TSX Composite Index were down 1% as of time of writing. The MOEX Russia Index was down approximately 33% on fears of the negative impact of the newly announced sanctions.

We’ll get to our destination but there will be pit stops along the way

Many of us have fond memories of piling into the car and embarking on a road trip to a desired destination. There were often ‘pit stops’ along the way—those that we anticipated, like stopping for meals or gas, and those that were unexpected, like road construction or a flat tire. Despite these short-term setbacks, we would inevitably reach our destination.

A case for optimism

A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.
– Winston Churchill

One of the best examples of eternal optimism is author J.K. Rowling’s success story. Her original Harry Potter novel was rejected 12 times before it was published. Despite these setbacks, Rowling never stopped believing in her idea. She was ultimately rewarded for her perseverance, and more often than not, investors are rewarded for their optimism.

Economic recovery
The global economy led by the U.S. continues its gradual recovery—supported by economic reopening and COVID-19 vaccine distribution. Stronger consumption is expected through 2021 fueled by consumers with excess savings and pent-up demand for goods and services. The recovery ends as the services sector catches up to the manufacturing sector’s recovery. In this environment, average market returns are expected during the next couple of years with some upside risk.

A year after the pandemic low, the economy is set to surge.

March 23 marked the one-year anniversary of the market low brought on by the pandemic. Since then, the S&P 500 has seen its largest 12-month gain since 1936, exceeding the recovery in 2010 from the global financial crisis. Equity markets performed well through the first quarter, extending the gains made since March last year. The S&P/TSX rose 7.3%, while the S&P 500, Nasdaq and MSCI EAFE respectively gained 5.8%, 2.8% and 2.8% in U.S. dollar terms. Perhaps the biggest surprise to the market was the increase in bond yields. The U.S.10-Year Treasury Yield started the year at 0.91% and very quickly rose by 83 basis points to end the quarter at 1.74%. The 10-Year Government of Canada bond yield gained 88 basis points to finish the quarter at 1.56%.

2020 will go down as one for the history books. The first reports of a mysterious virus quickly turned into a pandemic, global shutdown and the worst economic crisis since the Great Depression. And yet, by the end of the year, markets had recovered beyond expectations.

Global markets continued their recovery during the summer, followed by a slight pullback in September.
In Canada, the S&P/TSX Composite Total Return Index carried on with its strong rebound before stumbling in September, finishing with a return of 4.7%, including dividends in the third quarter. Following the sharpest quarterly contraction in GDP on record, U.S. equity markets continued their strongest rally from a bear market in history. The S&P 500, Dow Jones and Nasdaq all surpassed their pre-COVID highs, respectively jumping 8.9%, 8.2% and 11.2% in U.S. dollar terms, on a total return basis during the third quarter. In overseas markets, international equities rallied 4.9 % in U.S. dollar terms as measured by the MSCI EAFE Index, including dividends during the same period.

In their latest investor-friendly report and videos, the Capital Markets Strategy team at Manulife Investment Management shares their market outlook for the remainder of 2020 and into 2021. Learn more about why they’re forecasting a recovery and how they’ve updated their model portfolio weightings.

Read the full report and watch the videos here:
https://www.manulifeim.com/retail/ca/en/viewpoints/capital-markets-strategy/market-intelligence

The stock markets in 2020 have resembled riding a wild roller coaster for investors. Despite a very weak economic outlook earlier in the year due to uncertainty surrounding the coronavirus, major global stock markets have recovered most of their losses for the year. Investor sentiment seems to have improved due to several reasons:

What a difference a year makes!

We saw quite a turnaround story in 2019 compared with 2018. Despite escalating trade tensions between the United States and China, Brexit uncertainty, and a slowdown in the global economy, the year progressed in an unexpectedly pleasant fashion. In the second half of the year, global markets soaked up additional stimulus from global central banks and a first phase deal between the United States and China to extend the longest bull market in history. By the end of the year, every major asset class was materially positive.

Global markets continue to climb
Global equity markets had modest returns in the third quarter after a stellar first half of the year. Markets traded sideways due to 3 main factors--a slowing global economy, which affected company earnings, rising geopolitical tensions in the Middle East, and ongoing trade tensions between the United States and China, which affected global trade volumes.

Global markets continue to march higher
After a near bear market in the final three months of 2018, we have experienced a sharp reversal during the first half of 2019, with two recent material market-shaping events. First, the U.S. Federal Reserve met to discuss interest rate policy–specifically the potential for interest rate cuts, which proved positive for equity and bond performance. Second, President Trump and Chinese President Xi Jinping met at the G20 to discuss the trade dispute between the two countries. Afterward, both sides agreed to delay any further tariffs. Market sentiment often moves like a pendulum and after swinging toward very negative sentiment near the end of 2018, markets have swung quickly back toward positive sentiment.

It was a challenging year for market returns and global economic growth.

2018 was the weakest year for global markets since the great financial crisis in 2008. Markets were dragged down substantially in the final three months of the year due to higher interest rates, a slowing global economy, U.S. government shutdown and continued trade tension between the United States and China. Equity markets can move up or down for many reasons but over the long term, market valuations tend to return to their fundamentals. However, the fundamentals during the past year do not justify the sell-off that we’ve experienced, which suggests that the worst may be behind us.