To say that the first half of 2022 has been a tumultuous start to the year for investors is an understatement. In the first six months of 2022 the S&P 500 declined by 20.6% while the Tech-heavy Nasdaq index fell by nearly 30%. To put things in perspective, the S&P 500 had its worst first half in more than 50 years. The last time the market suffered these types of losses was in 1970 when the S&P 500 lost 21% in the first half of that year. This happened during a period of high inflation that the current environment has been compared with. The challenging market conditions during the first half of the year were a global phenomenon with several market indices falling between 15-20% across Europe, Developed Asia, and the Emerging Markets.
The European election cycle is turning out to be more of a feel-good story rather than being tension-filled as originally anticipated. With the Dutch and French elections behind us and the populist parties being defeated in both cases, the antagonists Geert Wilders and Marine Le Pen appear to have left the stage. We still have to wait until September for the German election to take place.
Last quarter we talked about how soft sentiment data such as the survey of expected business conditions could be a leading indicator of a stronger US economy ahead. However, with US GDP coming in at 1.4% for the first quarter down from 2.1% in the fourth quarter as well as weaker industrial production and retail sales in May, the hard data is mixed at best. Nevertheless, this did not stop the US Federal Reserve (Fed) from increasing the federal funds interest rate again in June for the second time in 2017 citing the continued strengthening of the US labour market and expansion of economic activity including household spending and business fixed investment. It also appears there could be one more rate hike between now and year-end based on the Feds projections from its June meeting. The Fed also announced it will begin unwinding its $4.5 trillion in securities holdings by decreasing the reinvestment of the principal payments it receives from securities held on its balance sheet. Effectively, the Fed will cap (in graduated increments) the amount it will reinvest from maturing securities going forward, which equates to another form of monetary tightening, the exact impact of which is uncertain.
The North American equity markets were off to one of the worst starts to the year since 2009. We saw both the TSX and the S&P500 indices decline almost 9% and 11%, respectively, at their low points in January and February of 2016. In Canada, slowing emerging market growth, in particular China, as well as lower oil prices which hit a 13 year low and negative investor sentiment were the main factors driving the TSX Index lower. Oil, which began the year at US $37.04 hit a low in February of US $26 before bouncing back to close at US $38 on March 31st. In January, the Canadian dollar also hit a 13 year low of US $0.685 before recovering to almost US $0.77 by the end of the quarter. The recovery was initially triggered by news that the Bank of Canada (BoC) left its benchmark rate unchanged at its January meeting, rather than making the anticipated cut. In its January statement, the BoC said that inflation in Canada is evolving broadly as expected.