Equity markets, including the S&P 500 Index, the S&P/TSX Composite Index and the MSCI EAFE Index (which represents international equities) saw gains from their lows earlier in the year. However, they still ended 2022 lower than at the beginning of the year.
We also saw improvement for fixed income in the fourth quarter, but as we head into 2023, we’re very conscious of a greater risk of recession, both in Canada and the United States.
Canadian equities
While the S&P/TSX Composite Index saw gains of 5.1% this quarter (driven by the information technology and consumer discretionary sectors), it underperformed its global peers. All sectors, except utilities and health care, were up for the quarter.
Information technology performed well in Q4 but closed the year with a loss of more than 50%. Canada’s negative performance in 2022 was largely due to Shopify (which started the year as Canada's most valuable company) falling in value from $155.22 to $47.01 per share over the year.
U.S. equities
The U.S. stock market rose 7.08%, with energy, materials and industrials the main contributors, while telecommunications stocks lagged. Better-than-anticipated corporate earnings drove this performance, with 70.7% of firms beating estimates.
The telecommunications sector, which includes social media companies, had the worst performance of the year and was even negative in Q4 — an otherwise great quarter for U.S. stocks.
International equities
The Europe, Australasia and Far East (EAFE) Index had a great quarter, rising 17%, and closed the year with a better return than the U.S. China's reopening and attractive valuations helped drive the index higher, crossing its 200-day moving average for the first time in 2022.
International market valuations remain attractive; while the S&P 500 ended the year with an earnings multiple of 18.59x, the EAFE Index’s multiple was 13.58x. This represents an ongoing discount for international equities, compared to the U.S.
Fixed income
Barclay's Global Aggregate Bond Index returned 4.55%, while Canada's Government Bond Index was slightly negative at 0.21%. The 10-year U.S. bond rate fell sharply from a 4.24% high to a 3.41% low in the quarter, before stabilizing at 3.87% by year end.
In Canada, 10-year bonds saw new highs at 3.68%, before dipping to 2.75% and finally closing at 3.3%. High volatility in rates was a constant theme in Q4, as it had been throughout 2022.
Causes for greater optimism for 2023
Despite some of the economic headwinds that we expect in 2023 (with a potential recession in Canada and the U.S.), we also have an environment with much better equity valuations, more stable interest rates and falling inflation.
We believe that inflation, interest rates and asset class correlations are likely near their peaks. Equity markets are likely close to their trough, and we expect fixed income to possibly deliver its best returns in years.
We are therefore looking ahead with expectations that the coming year will be better than 2022.
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