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Omicron unable to deter strong close to the markets in 2021

“More of the same” was the theme for this quarter, as a reflection of what we saw throughout the earlier part of the year. We saw improvements in both the economy (in Canada, the U.S. and many markets around the world) and with the way that we dealt with the pandemic. 

With the Omicron variant appearing to be milder, even though more transmissible, the Canadian and U.S. economies continued to improve, with the Canadian unemployment rate dropping to just 0.3% above the January 2020 low. Corporate profits exceeded pre-pandemic levels. 

Equity investors were rewarded with another strong year in 2021 that was capped off by a Santa Claus rally in the fourth quarter. Inflation continued to rise, reaching levels not seen in decades. While bond yields didn’t move much in the last quarter, they had seen increases earlier in the year, due to expectations of central banks raising interest rates.  

Canadian equities 

A strong quarter ended a strong year for Canada’s S&P TSX Composite. It gained 5.7% this quarter and 21.7% for the year. Materials, real estate and financials were the highest-performing sectors, with health care and IT being the only sectors to drop this quarter.  

U.S. equities

The S&P 500 Index gained 10.3%, topping off a very good year that ended with total gains of 25.7% (in Canadian dollar terms). The quarter’s best performers were real estate, IT and materials, with IT managing to rebound from a particularly volatile third quarter to finish strong. Financials and energy had the strongest year overall (with crude oil gaining US$26 per barrel).

International equities

International stocks also gained (according to the MSCI EAFE Index), albeit by a more modest amount of 2.1%, and delivered a full year return of 7.8% (in Canadian dollar terms). As they have since around March, emerging markets lagged this quarter and ended the year in the red. This was due to a combination of China’s economic weakness and U.S. dollar strength. 

Fixed income

Bond markets were mixed this quarter: Canadian fixed income benchmarks rebounded modestly as yields fell, and U.S. high-yield and investment grade corporate bonds performed well. U.S. high-yield bonds were the standout performer for the year with a gain of 5.4% (in U.S. dollars). High yield bonds tend to rise in sync with rising interest rates.

The year ahead

We expect 2022 to be another strong economic year, but slower than the rapid growth we saw in 2021. Consequently, we expect more moderate economic growth to bring moderate earnings. Bond markets will continue to focus on inflation and how central banks respond to it: we could continue to see rising rates. And while 2022 won’t be without risk, we do expect it to be another rewarding year for investors.