Your Financial Review of January 2023

Cathy Duval |

Invasion, Inflation, Recession? A Look Back at 2022

At this time last year, the main theme of our market review and our annual outlook was the impending shift in central banks’ policies, but little did we know that the American Federal Reserve (Fed) and the Bank of Canada would take such drastic measures in 2022 to deal with persistent inflation.


The massive government spending of the previous year, the Russian invasion of Ukraine, the strict zero COVID policy in China, as well as OPEC+ oil production cuts have resulted in record inflation.


Clearly, central banks were caught off guard by the persistence of inflationary pressures. After starting in 2021 on the consumer goods side (supply chains), followed by food and energy (exacerbated by the war in Ukraine that started in early 2022), inflation eventually migrated to services throughout the year, a symptom of an overheated economy. Result of this inflationary trifecta: a four-decade peak for the US and Canadian Consumer Price Indices (CPI)1.


Thus, it is not 0.75% in hikes that the Fed delivered this year (as anticipated by the markets as of December 31, 2021), but an imposing 4.25% (4.00% in Canada) … And it's not over.


Arguably, 2022 has been challenging on several fronts, as we now expect a recession in the coming months.


2022 Market Review


Fixed Income


  • The Canadian fixed income universe (FTSE Canadian bond universe) posted losses in December, as medium and long-term bond yields started to rise again in the face of the combative tone of central banks.


  • Overall, 2022 is actually the worst year on record for Canadian bonds (-11.7%). This loss comes on top of the decline seen in 2021 (-2.5%), marking the first time the Canadian bond universe has recorded two consecutive annual declines.



  • Like bonds, stock markets faced several pitfalls in 2022.


  • Benefiting from a strong exposure to commodities, Canadian equities (S&P/TSX) outperformed their international counterparts. Over the full year, the S&P/TSX index posted a total return of -5.8%.


  • South of the border, US stocks (S&P 5002) were down 18.1% over the same period.


  • Finally, the rally in international equities (MSCI EAFE2,3) in the fourth quarter of 2022 allowed the MSCI EAFE to post a decline of 14% for the year just ended.




  • The price of a barrel of oil fell sharply in November and continued on this downward trend in December. Thus, despite the Russian invasion of Ukraine and the dramatic rebound that followed, the WTI4 (US$/barrel) ended the year with a relatively modest gain of 6.7%.


  • The price of gold rose significantly in the last quarter. However, this last-minute rally was not enough to completely erase its 2022 decline. Between January and December last year, the price of gold fell by 0.6%.




  • The Canadian dollar lost ground against the US dollar in 2022. The USD/CAD pair fell 6.8% between January and December despite the loonie's rebound against the greenback in the fourth quarter.


1. The Consumer Price Index (CPI) represents price changes as experienced by consumers. It measures price change by comparing, over time, the cost of a fixed basket of goods and services.
2. S&P500 and MSCI EAFE returns are expressed in US currency.
3. The MSCI EAFE Index is an equity index designed to measure the performance of equity markets in developed economies other than the United States and Canada.
4. West Texas Intermediate (WTI) Crude oil is the North American standard for pricing oil.


Investment Outlook


Following this challenging year, what can investors expect? A simple reversion to the mean leading to gains? Or are there other factors to consider?


While the primary story of 2022 was central banks playing catch-up against inflation, 2023 should see them first slowing the pace of rate hikes and, ultimately, pausing to assess the effects of their restrictive monetary policy. In essence, this is what Fed Chairman Jerome Powell alluded to during his press conference last November:


“So, I think you can think about our tightening program as really addressing three questions, the first of which was, and has been, how fast to go. The second is how high to raise our policy rate. And the third will be, eventually, how long to remain at a restrictive level.”

- Jerome Powell, November 2, 2022.


On the economic front, experts forecast a marked slowdown in inflation in 2023 as well as a period of stagnation (little or no growth in an economy) for GDP growth5 in North America. This outlook comes with high risks of recession, beyond the one clearly unavoidable in Europe.


After a historic annual pullback for Canadian bonds, the new year should ultimately be more favourable to them. For the time being, we still favour a shorter bond duration6 considering the risk that the continued combative rhetoric at the Fed will lead long rates to revisit their recent highs, but an opportunity to increase duration should present itself in 2023.


On the equities side, we continue to favour Canadian equities, which have clearly outperformed in 2022. American equities also retain their place in portfolios for their more defensive properties. Indeed, they are less sensitive to increases in interest rates since the real estate market in the United States is less inflamed than in Canada and the personal debt ratio is also lower there. On the other hand, the outlook for the EAFE7 region still seems weak, as economic growth is likely to remain affected by the energy disruptions, which encourages us to maintain an underweight allocation in foreign equities while actively managing currencies to take advantage of divergences between central bank policies.


5. Gross Domestic Product (GDP) is a general measure of a country's economic activity based on the total market value of all goods and services that country produces in a given period of time.
6. Duration measures the sensitivity of a bond's value to changes in interest rates, taking into account its maturity, yield, coupon and prepayment clause.
7. Represents developed economies excluding the United States and Canada (Europe, Australia and the Far East)


We remain available to schedule a call at your convenience to discuss our outlook and the positioning of our portfolio in more detail.


The Duval Group wishes you a year filled with happiness and health!




Cathy, Guillaume, Marc-Antoine and Inuk

514 871-3474

Disclaimer: I have written this commentary to provide you with my thoughts on various investment solutions and considerations that may be relevant to your investment portfolio. This commentary reflects my opinion only and may not reflect those of National Bank Financial Group. In expressing these opinions, I try to apply my judgment and professional experience to the best of my ability from the perspective of a person called upon to follow a wide range of investments. Therefore, this report represents my informed opinion and not a research analysis produced by the Research Department of National Bank Financial. National Bank Financial is an indirect wholly owned subsidiary of National Bank of Canada. National Bank of Canada is a public company listed on the Toronto Stock Exchange (NA: TSX). National Bank Financial is a member of the Canadian Investor Protection Fund (CIPF).