Economics

• The Canadian unemployment rate decreased 0.1% to 5.0% in December, just above the record low of 4.9% reached in June and July. Average hourly wages were up 5.1% over the year but failed to keep pace with inflation.¹
• The unemployment rate in the US edged down to 3.5% in December. Average hourly wages increased 4.6% over the year, the least since August 2021 and below market estimates of 5%.²
• Annualized Q3 GDP for the US was confirmed at 3.8% in December and 2.9% in Canada with both experiencing positive growth over the past few quarters.
• Surging inflation, a hawkish Federal Reserve and slower economic growth have contributed to a strong US dollar in 2022, closing out the year at 1.3569 CAD

Markets

• The last quarter in 2022 saw positive returns from all major asset classes such as fixed income and equity indices.
• The S&P 500 finished the quarter up 5.4%, the S&P/TSX up 6.0%, and developed international markets (measured by the MSCI EAFE) up 15%, all in Canadian dollar terms (Bloomberg).
• The yields on 10-year Canada Government and US Treasuries were 3.3% and 3.9% respectively at the end of 2022. Although the increase in yields means higher costs for borrows, the flipside is savers have more options to earn a return without taking on a lot of risk.

The market is cheaper than it appears

On a broad-based basis, the market is cheaper than it optically appears, as the elevated valuations of the largest stocks in the index lift the overall index price to earnings ratio. This also suggests that the bottom 476 stocks are more representative of what the stock market is pricing than the top 24 stocks. Excluding the largest companies that are likely to fare relatively well even in a recession, the market is pricing in quite a bit of bad news.

During the quarter, all the funds, which include the Compass O Series portfolios and ATBIS Pools O Series, had positive returns.  

For fixed income, the last quarter saw positive relative returns gaining roughly 1% compared to the 0.6% for the FTSE Canada Universe Index. Holding bonds that were shorter in term, and therefore less price sensitive to interest rate movements, was the primary difference. 

We continue to focus on building quality, including increasing the percentage of holdings in high-quality AA and AAA ratings. These changes position the funds to capitalize on potential opportunities in the credit market, should a recession occur. In the meantime, the overall bond portfolio including mortgages as of the end of the quarter was priced to yield 6.29%

Equities saw moderate movement over the quarter. The majority of the holdings remained the same and the sub-advisors focused on finding well-managed resilient businesses. The funds ended close to overall benchmarks with Canada and US ahead but lagging international. In early December, Picton Mahoney Asset Management was added as a new Canadian equity small cap sub-advisor for the funds, and is known for its attractive risk adjusted performance and consistent downside protection.