Stocks and bonds fell into the ‘perfect storm’ this year. What’s in store for investors in 2023? – Nation
Investors have had few places to hide this year.
By Wednesday’s close, Canada’s main stock index was down 12% from its all-time high it hit in the spring. Link marketcapital often moves in the opposite direction to stocks, also dropped sharply after central banks around the world strongly raised interest rates to curb rising inflation.
The pressure is unlikely to ease as we head into 2023. The US Federal Reserve has hinted that interest rates could continue to rise and the Bank of Canada is also mulling further rate hikes. Investors face the possibility of a recession and what that means for corporate profits already squeezed by rising costs.
Looking back over the past 12 months, Brent Joyce, director of investment strategy at BMO Private Investment Counsel Inc., says it has been one of the worst years for a combined stock-and-bond portfolio.
“It was a perfect storm,” he said.
Joyce said investors have adjusted to what he calls more normal conditions with an end to near-zero interest rates and a return to risk on equities.
The year isn’t off to a bad start for the Toronto Stock Exchange.
As oil prices spiked with Russia’s invasion of Ukraine, the commodity-heavy S&P/TSX composite rallied. With oil prices above $100 a barrel for the first time in years, Canada’s main stock index hit a record close on March 29, ending the trading day at 22,087.22 and continuing on. reached an intraday high of 22,213.07 on April 5.
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However, sentiment changed as inflation gained traction and central banks diverged and started raising interest rates from the emergency lows they were set at the start of the pandemic.
In response, the stock market lost momentum and began to decelerate. The S&P/TSX composite hit a year low of 18,206.28 on October 12, followed by an intraday low of 17,873.18 a day later on October 13. Though it did climb above the 19,500 mark in the past few months, but December stock gains have not materialized this year.
Mona Mahajan, senior investment strategist at Edward Jones, said higher interest rates put pressure on stock valuations, especially for those sectors where they are high.
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“Areas like technology and growth, more speculative asset classes, all of which are really going to hit the ground running in 2022,” she said.
Some tech companies have seen growth during the pandemic, Mahajan said, supporting those valuations, but the trend started to cool during the reopening phase.
Normally in a bearish year for stocks, you can rely on your bond portfolio to diversify somewhat, Mahajan said, but that was not the case this year.
“Rapidly changing interest rates, soaring inflation all put downward pressure on stocks and bonds,” she said.
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One of the few bright spots for the Canadian market is the energy sector.
“The two most unpopular investment opportunities of the past 10 years will be cash and energy stocks. And you know, they rose like phoenixes from the ashes to be this year’s winners,” Joyce said.
Heading into the new year, economic headwinds remain as economists point to the possibility of a recession early in the year.
Mahajan also said risks around inflation remain although it has shown signs of cooling in recent months. She warned inflation could be more severe than expected if supply problems were harder to deal with or if demand remained strong and caused prices to soar.
“That’s probably the biggest of all the risks we’re seeing out there,” she said.
But Mahajan said the market is looking to the future, so 2023 will provide a better backdrop for stocks and bonds after what she predicts is a mild recession as we get through the economic crisis. .
The energy sector is clearly the winner in 2022, she said, but traditional and defensive value sectors such as consumer staples, utilities and healthcare also performed well.
“As we near the first quarter or two quarters of 2023, we think those parts of the market could continue,” she said.
“But as we move towards what we call a recovery manual, that is where we start to see better performance from (stock) quality growth, outside of areas like cycles.” she speaks.
Joyce is also bullish on 2023 as he said capital markets have spent a year adjusting to the new reality of inflation, higher interest rates, slowing growth and rising geopolitical tensions.
A lot of complacency has been removed from the system, he said, and that resetting to higher bond yields is more of a late stage than a beginning.
“Many equity and bond markets have come a long way to adapt to current realities,” he said.
“Looking ahead, we see better investment opportunities today than they did a year ago.”
© 2022 Canadian Press