August 2022 market and economic commentary
By ATB Investment Management Inc. 7 September 2022 3 min read
August started out on a positive note with equities continuing their rally from July. But mid-month, Russian gas supply disruptions caused turbulent energy markets in Europe. That, coupled with the Federal Reserve’s reiteration of its commitment to hawkish policy, led to volatility in markets. This resulted in bond yields jumping 50 to 70 basis points, and curbed growth enthusiasm from investors. Ultimately, equities and bonds lost ground towards the end of the month and finished negative when compared to prices at the end of July.
Below are total returns in Canadian dollar terms for August, and year-to-date respectively:
|Major market indices||August, 20221||YTD return1|
|S&P/TSX Composite Index||-1.6%||-7.2%|
|S&P 500 Index||-2.0%||-13.2%|
|MSCI EAFE Index||-2.6%||-16.7%|
|FTSE Canada Universe Bond Index||-2.7%||-11.3%|
Inflation figures for July showed declines for the first time this year in both the US and Canada. Within Europe, however, headline inflation climbed higher. The UK in particular hit double digits at 10.1%. Energy prices remain a volatile factor within the headline numbers. Declining crude oil prices were the main contributor to the decrease in North American inflation, but for Europe, the greater dependence on Russian energy exports has kept prices elevated. Reported higher European natural gas inventories provided some relief toward month end and saw UK natural gas prices within the futures market falling roughly 30%, but remaining higher than July levels.
Jerome Powell, chair of the US Federal Reserve (Fed), spoke at an economic symposium in Jackson Hole, Wyo. on Aug. 26. Markets were awaiting his remarks wondering if the lower inflation print might lead the central bank to ease off on its additional planned interest rate hikes. Powell instead commented that one month of decline was not sufficient enough to pivot from the strategy. Labour markets remained strong allowing the Fed to stay focused on bringing inflation back to its 2% target goal. The Fed meets again Sept. 21 and is expected to hike interest rates by another 0.5% to 0.75%. The Bank of Canada meets Sept. 7, with similar expectations of a 0.75% increase.
Both bond and equity markets had a volatile month with the media continuing to portray conflicting narratives as to whether various developed markets are already in a recession, or heading for one. While the economic debate continues, company fundamentals have not shown signs of deterioration, and are holding up well as evidenced by second quarter earnings releases. Nearly all companies had reported by the end of August showing positive growth to both sales and earnings on average with just over 75% of S&P 500 companies exceeding analyst expectations.
Despite fundamentals holding up, overall equities ended the month with a negative return slightly behind where they started the month. Growth stocks and small cap names were hit harder, as higher interest rates and lowered growth expectations from central bank commitment to fighting inflation dried up investor appetite for risk. The ATBIM funds performed in-line on a relative basis within the US, whereas within Canada, many of the highly cyclical energy and resources names rallied on the month, leading to the Canadian portion of the holdings underperforming by about 1%. On the international stage, European stocks led the way down as volatility from energy prices continue to weigh heavily on growth. This led to about a 1% underperformance for the month within the funds’ international equities, as the holdings overweight European names that underperformed their developed market peers such as Japan.
Bonds similarly saw price declines for the month as yields rose about 0.5%, reversing rate declines from July. Yields for the overall market based on the FTSE Canada Universe ended the month at 4%, and investment grade spreads were slightly lower for the month. The increase in yields left the fixed income within the funds with less duration and performing better on a relative basis by about 1.7%2, down 1% compared to 2.7% for the overall Canadian bond market. Fixed-income holdings within the funds continue to have a higher degree of credit and overall yield of 5.3% with a duration of just over four years.
ATBIS Fixed Income Pool Series O compared to FTSE Canada Universe Index total return
This report has been prepared by ATB Investment Management Inc. (“ATBIM”) which manages the Compass Portfolios and ATBIS Pools. ATB Wealth ( a registered trade name) consists of a range of financial services provided by ATB Financial and certain of its subsidiaries. ATB Investment Management Inc., ATB Securities Inc., and ATB Insurance Advisors Inc. are individually licensed users of ATB Wealth. ATB Securities Inc. is a member of the Canadian Investor Protection Fund and Investment Industry Regulatory Organization of Canada.
The mutual fund performance data provided assumes reinvestment of distributions only and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that may reduce returns. Unit values of mutual funds will fluctuate and past performance may not be repeated. Mutual Funds are not insured by the Canada Deposit Insurance Corporation, nor guaranteed by ATBIM, ATBSI, ATB Financial, the province of Alberta, any other government or any government agency. Commissions, trailing commissions, management fees, and expenses may all be associated with mutual fund investments. Read the fund offering documents provided before investing. The Compass Portfolios and ATBIS Pools includes investments in other mutual funds. Information on these mutual funds, including the prospectus, is available on the internet at www.sedar.com.
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