Supply chain chaos, high inflation, geopolitical tensions, and anticipation of when the Fed would raise rates contributed to volatility in January.
Here’s a summary of the notable events that steered the markets.
COVID-19 and market developments
January was a roller-coaster ride for equities as US, Canadian and global indexes tumbled, recovered and sold off again before stabilizing and starting to climb a second time at month-end.
Bond markets, which tend to move much slower and in the opposite direction to equities, saw US Treasury yields and Canadian yields increase fractionally, and the yield curve flattened slightly.
Bitcoin moved with mainstream markets but with more extreme swings, halving in value at one point and compounded by events in Kazakhstan, although it had begun to recover by the end of the month.
Oil prices, which surged through 2021 and are currently a “thorn in the side” of inflation, hit a seven-year peak in January, mainly due to ongoing supply chain disruptions and Russia-Ukraine tensions.
Ontario postponed its reopening through January but started lifting restrictions again at month-end. Quebec kept its lockdown measures and briefly flirted with a proposed tax on unvaccinated adults.
January-February is the RRSP season, with March 1 being the deadline for 2021 contributions. The new year also brings an extra $6000 TFSA room. Both RRSPs and TFSAs hold most types of investments.
US inflation climbed again to 7%, its highest level in 40 years, driven by supply chain chaos, labor shortages and rising oil and consumer prices. The Fed called inflation “a severe threat,” reiterating it will raise rates soon, likely in March, as the economy no longer required emergency support. The Fed also stated it is still optimistic that inflation will cool down later this year. In addition, the Fed confirmed it was on track to complete the winding down of its pandemic stimulus by the end of Q1.
In Canada, inflation rose to 4.8%, its highest level in 30 years and the ninth consecutive month above the Bank of Canada’s 1-3% target range. This stemmed from higher prices for groceries, housing and vehicles. The Bank of Canada decided to hold interest rates, but aligning with the Fed, it could start to hike rates in the spring. The Bank of Canada ended its pandemic stimulus last quarter.
How does this affect my investments?
We are experiencing a natural, short-term adjustment as markets price in imminent rate hikes and the ending of pandemic stimulus by central banks and speculative investors exit cryptos and tech stocks. It is important to note that economic fundamentals and corporate earnings remain healthy. Inflation will likely cool down as supply chains normalize and prices ease but settle at a higher rate than we had pre-pandemic. It is also inevitable that the pace of growth will slow down after the record-breaking double digits returns of 2021.
Regardless of where we are in the market cycle, it is important to take a disciplined approach to investing, and stay focused on your long-term financial goals. We always recommend maintaining a diversified mix of asset classes in your portfolio to maximize potential returns and minimize risk. Regularly reviewing and rebalancing your portfolio also helps you stay on track.
Should you have any questions, please do not hesitate to contact your NPW Wealth Advisor.