Both stocks and bonds edged down further in April. Federal Reserve officials, including chair Jerome Powell, indicated “front-loading” interest rate hikes including a potential 0.5% increase in May, with the market pricing in a similar hike in June. The Bank of Canada is following a similar path and “not ruling out” further 0.5% hikes to aggressively tame inflation and price stability. As was the case for the first quarter, higher interest rates have added to volatility for April, moving bond prices lower. Higher rates always have the potential to slow the economy, so in anticipation of that, stocks have moved lower as well.

Below are total returns in Canadian dollar terms for April, and year-to-date respectively:

Commentary for April:

With the pandemic taking a back seat, all focus is now on any mention from central bankers regarding the future path of interest rates. Bond and equity markets saw some stability during the first part of April, but volatility returned as inflation remained elevated and central bankers indicated a potential need for more aggressive monetary policy, pushing yields up and stocks down. 

Despite inflation continuing to rise in both Canada and the US, some reprieve was seen in the US inflation figures where the growth in the price of goods —considered a non-volatile component — showed signs of leveling off. Used car prices were down for the second month in a row, after rising 53% since June 2020 to their peak in January this year. Another hope on the horizon for inflation is that the base effect should start having less of an impact. Core CPI started to pick up in April 2021 as the world started to look towards life after the pandemic and supply side issues started to take hold. 

The impact of inflation was also seen in US real GDP, which was negative for the first quarter of 2022. US GDP contracted by 1.4% on a real basis, but on a nominal basis increased 6.5% over the quarter, both quoted as seasonally adjusted annual rates. Market reaction to the contraction in GDP was muted, as it was entirely attributable to an imbalance of imports into the US economy. 

The Compass Portfolios and ATBIS Pools were pulled down for the month with the broader bond and equity markets dropping roughly 3% to 5%, but relative performance was positive. 

Bonds continued their first quarter course of performing better than the FTSE Canada Universe Bond Index. The fixed-income component across the Compass funds and the ATBIS Fixed Income Pool added 1.2%² relative to the index thanks to lower duration holdings that are less sensitive to interest rate movements. 

For stocks, the funds saw less downside overall. The US region saw the biggest relative gain, up .9% compared to the S&P 500 Index in CAD terms. Notable contributors making up that difference were larger weights in businesses such as Visa, Procter & Gamble, and Dollar General. These companies tend to be very stable cash flow producers regardless of the economic backdrop. Canada’s largest contributing factor to positive relative returns was once again holding far less of Shopify. It was the largest company in Canada by market capitalization at the end of 2021, but was at very high valuations. Shopify’s price fell 35% for the month, and is now down 68% year to date.

This has been a very atypical and jarring year for balanced and conservative investors with both stock and bond markets declining around 10%. Markets like these can test an investor’s resolve, but it's important to know that patience through these periods is typically rewarded, and we are optimistic for future returns. Bond-holders on a go-forward basis are getting the highest yields on average since 2010, and global stocks continue to trade at attractive valuations in an environment where earnings are still growing.