An eventful start to the year

In 2022, inflation has taken a prominent place in the economic news, a trend that continues into the start of 2023. Rapid price increases have caused serious concern among consumers.

In February, inflation appeared to be heading back towards central banks' target with a potential slowdown in job creation. This foreshadowed a soft landing for the economy since it was conceivable that the global monetary tightening would be enough to reduce inflation without tipping the economy into a recession.

Since then, statistics released by the United States have revealed that American consumers have shown more resilience than expected, with spending and the labour market remaining exceptionally buoyant. If a certain strength in the economy was desirable for a successful soft landing, too much strength entails risks for this scenario since it maintains inflation that is more persistent than expected.

The month of March added an additional dimension to an already complex puzzle. The March 10, flash collapse of Silicon Valley Bank (SVB) was the second-largest bank failure in US history (behind Washington Mutual in September 2008). Disruptions were quickly felt in the markets as the appearance of financial fragilities added to the growing list of signals that call for caution.

 

Market review as of March 31, 2023

 

Fixed Income

 

• The Canadian fixed income universe (FTSE Canadian bond universe) had a good monthly performance in March, as bond yields fell significantly in the face of turmoil in the banking sector.

 

• After a difficult year in 2022, Canadian bonds have posted a return of 3.2% since the start of the year, propelled by a precarious economic situation and the turbulence observed within the American banking sector.

 

Stock markets

 

After an optimistic start to the year, investor sentiment deteriorated from February as a series of economic data challenged the rosy picture painted by the markets.

 

• Year-to-date, international equities (MSCI EAFE¹) have returned 8.6%, followed by US equities (S&P 500²) with a return of 7.5%. Trailing somewhat due to its large exposure to the financial sector, the S&P/TSX³ index, meanwhile, posted a return of 4.6% over the same period.

 

 

Oil and Gold

 

• Oil prices continued their downward trend, recording a ninth monthly decline in ten months at the end of the quarter. The WTI⁴ was down 7.3% year to date, or 25.8% below its level at the same time last year.

 

• However, gold posted an excellent monthly gain of 8.2%, acting as a safe haven in the face of uncertainties related to banking disruptions.

 

Currencies

 

• The Canadian dollar remains relatively weak against the greenback. It continues to hold near its cyclical high of 1.39 CAD to 1 USD.

 

1. 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.

 

2. S&P500 and MSCI EAFE returns are expressed in US currency.

 

3. The S&P/TSX Index is the primary Canadian stock index measuring the performance of the Toronto Stock Exchange.

 

4. West Texas Intermediate (WTI) Crude oil is the North American standard for pricing oil.

 

Investment Outlook

 

Persistent inflation in the United States and Europe, the financial fragility of certain American regional banks and signals of medium-term recession risks have overcome the euphoria that had gripped the stock markets since the start of the 'year. With the current economic climate remaining highly uncertain, investors should expect the sharp swings in the markets to continue for some time.

 

In these circumstances, we remain confident that a defensive positioning within our asset allocation strategy is appropriate and will help reduce the volatility of your portfolio.

 

Looking ahead, we continue to closely monitor developments in inflation, the labour market and financial stability, the three pieces of the real puzzle that is the economic environment of 2023.

 

Feel free to contact us to learn more about our outlook and/or the positioning of your portfolio. It will be our pleasure to schedule a call at your convenience.

 

Cordially,

 

Cathy, Guillaume, Marc-Antoine & Inuk

Cathy.duval@bnc.ca

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).