The last quarter saw the emergence of new COVID-19 variant Omicron near the end of November. Data to date suggests higher transmissibility, but less severe outcomes when compared to prior strains. Restrictions have been put back in place, particularly around travel and social gatherings. Businesses have also been impacted, although less than lockdowns from early waves and from disruptions surrounding isolation requirements as opposed to operating restrictions. Vaccine uptake continues to improve with the addition of 5- to11-year-old children becoming eligible for the vaccine in November. Canadians with at least one vaccine accounted for 83% of the population in December, a 3% increase from November.³

As COVID-19 persists, so do the economic imbalances caused by the pandemic—such as inflation, which has risen to levels not seen for decades. Job loss and business disruption from outbreaks have lessened the supply of goods. However, fewer job losses in higher-paying positions, and government relief programs for those who did lose their jobs, have left individuals in a better financial position overall compared to a typical recession. In turn, this has increased demand for goods.⁴ Fewer goods available coupled with higher demand have led to inflation—an increase in prices—for many goods and services. In Canada, the last print for 2021 showed the year-over-year level at 4.7%, the highest since 2003. The US was even higher at 6.8%. Central banks on average still forecast these levels to dissipate into 2022 as imbalances between supply and demand move back to equilibrium. In support of that outlook, retail sales seem to have leveled off over the last two quarters (in inflation-adjusted terms). Increases in energy prices when compared to 2020 levels have been an inordinately large contributor to inflation. Prices for both natural gas and crude oil peaked in October, which should help temper inflation in the coming months.

The equity markets had an outstanding year overall supported by easy fiscal and monetary policy, which boosted investor confidence, and strong consumer demand that drove earnings growth. In spite of the dip of March 2020, equities over the last two years provided a total return of about 34.3%⁵ between price increases and dividends. Overall we are left with equity valuations only slightly elevated from the end of 2019, at a roughly 21 times price-to-earnings ratio. This gives an earnings yield of 5%, which, when coupled with real earnings growth of 1-2%, can still give a forecasted return of 6-7% for stocks over the medium to long term. Equities remain a good value when compared to other assets such as bonds with yields of around 2%.

Bond markets saw mid- to long-term yields rise earlier in the year in anticipation of growth and potential long-term inflation. The rest of the year saw some volatility, especially as inflation picked up in Q3, but sentiment from central banks worldwide shifted to potentially being more aggressive in stamping out inflation. The Bank of England was the first developed central bank to raise interest rates in December. Despite the shift in central bank positioning and uncertainty surrounding the new COVID-19 variant, corporate bond spreads in Canada were largely unchanged throughout the year. Although rates in general fell through December—helping to boost returns—bonds overall are still down roughly 3% for 2021, becoming the worst year for bonds since 1994.