Turbulent might be a good word to describe markets in the first month of 2022. Equities began to slide early in the month. The catalyst could have been an initial market reaction to the Federal Open Market Committee’s Dec. meeting minutes released on Jan. 5th. The minutes pointed at the possibility of faster-than-expected rate hikes. That same day, equity markets started to decline and didn’t see much reprieve until after the Federal Reserve meeting on Jan. 26. There was no immediate rate hike announced—which no doubt reduced some market jitters—but the timeline has clearly been pushed ahead, with higher interest rates slated to begin around March.

Below are total returns in Canadian dollar terms for January:

Commentary for January:

The sell-off this month appeared broad-based on the surface, but certain assets and regions were impacted more than others.

In terms of equities, Canadian stocks held up well compared to US and overseas markets thanks largely to our oversized financial and energy sectors. Both sectors together make up nearly half of the S&P TSX Composite Index, and each actually saw positive returns for the month. As a result, the equity sell-off was more subdued in Canada, down roughly 0.4%.

Of any region, the US was hardest hit overall, although the last few days of the month pushed markets up. Energy and financials still fared well in the US, but they make up a much smaller overall weight at 15% of the market. Technology and consumer discretionary, the hardest hit sectors, make up close to 40% of the market. As for why, it plausibly circles back to rising interest rates. These sectors have many companies that trade at higher valuations for higher rates of earnings growth. However, a lot of those earnings won’t come to fruition and start making their way back to an investor’s pocket for many years. In a world of rising interest rates, and high inflation, investors are less keen to wait, and so those companies have sold off more than others.

While the largest economies continue to make a comeback as restrictions ease and the Omicron variant starts to wane, the Chinese economy has become increasingly divergent from its world-wide peers. A drastic slowdown in Chinese real estate that eventually culminated in the Evergrande debacle continues to weigh on markets. In response, the Chinese government cut key lending rates and relaxed some banking regulations to re-stimulate growth. This, combined with political tensions in Ukraine, resulted in international equities, particularly in emerging markets, losing ground during the month.

Bonds, typically the stalwart of the portfolio meant to offset equity risk, also faltered for the month, down 3.4% as a result of rising government bond yields. Just like those tech stocks, if interest rates are rising, existing bonds paying fixed-rate coupon interest won’t be worth as much after rates increase. As a result, prices fall to compensate new buyers. Long-maturity bonds, with cash flows stretched far into the future, were understandably hardest hit, down 6.9%. While bonds as a whole saw weakness during the month, corporate bonds performed relatively well as a result of little movement in credit spreads and a shorter duration. While the equity markets may be less optimistic due to rising yields, credit markets are not sharing the same risk sentiment. In support of this, company earnings growth continues to be robust, based on quarterly earnings releases year to date.