January 2022

2021

It has been an interesting year in the market, while it was up overall, it ended up down from its high earlier in the year. We saw several significant sell offs, followed by market increases. We have seen companies’ fundamentals improve after the challenges of 2020 and expect the strong tailwinds to continue into 2022.

2022

The world economy seems ready for another year of above-average activity. We expect the private sector to take over from governments as the primary engine for economic growth. Labour markets are improving and business capital spending is on the upswing. Consumer demand is very strong and supply chain disruptions are expected to ease over the year. There are, however several challenges that we see coming in 2022. Covid will continue to pose risks, not only with Omicron, but any future potential variants; inflation and the likelihood of rising interest rates continue to be a concern.

GDP

With the help of policy support and healthcare technology, the world economy is two years into recovering from the effects of the worst pandemic experienced since 1918-20. Economic growth is likely to see growth in 2022, supported by low borrowing rates, ongoing gains in employment, business capital spending and inventory re-stocking. Global GDP growth is on track to hit 5.9% in 2021. This represents the strongest pace of economic gains since at least 1980 and follows the pandemic induced 3.1% decline in 2020 (www.oecd.org).

Labour & Consumer Spending

Labour markets are also on the mend. Employment growth has been strong for more than a year, helping to push the unemployment rates down around the world. The OECD’s measure of unemployment has declined from a multi-decade high of 8.8% recorded in April 2020 to 5.8% most recently. Consumer spending is supported by healthy and ongoing labor market gains. We are seeing increases in business spending spurred on by consumer demand, with an increased focus on a cleaner energy and increasing productivity to offset the rise in input costs. There is also an abnormally large amount of accumulated consumer savings, which can be used to fund future expenditures or it might be tapped into for discretionary spending or increased investing if the labor market remains strong.

Inflation

Inflation was a significant story line in 2021. In the U.S. and Canada, for example, core CPI inflation is running at 4.6% and 3.8%, respectively. These represent the fastest pace of price increases since the early 1990s. Over the past year in North America: Beef +24%, Hotels +26%, Laundry Equipment +15%, Gasoline +51%, Used Cars +26%, Eggs +12%, Furniture & Bedding +12% (www.dynamicfunds.ca). As discussed earlier, consumer demand has been extremely high and is one of the factors that has led to record inflation. However, supply chain disruptions and bottlenecks are the leading causes of this uncomfortable cycle of price inflation. The hope is that supply chains will loosen as borders open, labour

returns to work and more of the world gets vaccinated.

Interest Rates

Both the Bank of Canada and the American Federal Reserve have indicated that they will likely be increasing interest rates in 2022. This is deemed necessary to try and combat increasing inflation rates. Even though interest rates are expected to rise over the next year, they are likely to remain at the low end of their historical range. Central banks will be reluctant to stress an economy recovering from a pandemic by increasing rates too quickly. Hopefully increased supply will show that high inflation was in fact transitionary and significant interest rate increases are not necessary.

Conclusion

Investors remain focused on earnings growth, which has been surprisingly strong in most parts of the world. The upward march for earnings is likely to continue, although likely at a slower rate. Rising interest rates over the next year might be one barrier to higher stock prices, but this is not the same thing as saying that markets will go down. There have been 20 Federal Reserve tightening cycles since the 1930s. On most occasions, equity markets were able to find higher ground. The average annualized return for U.S. equities during these prior monetary tightening campaigns was 6.7% (Miles Zyblock, December 10, 2021@ www.dynamic.ca). Clearly the biggest concern for 2022 is still COVID- 19. It seems

that every time we feel like we are making progress, we end up in another “wave”. We remain optimistic that significant lockdowns are behind us and the world will be able to move forward in 2022.

Even if this is the case, it is important to be prepared for a bumpy ride.

This information has been prepared by Shannon Straathof who is an Investment Advisor for IA Private Wealth® and does not necessarily reflect the opinion of IA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered. IA Private Wealth® is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization.