2022 was marked by dramatic events that no one could have predicted. The invasion of
Ukraine by Russian troops launched the first massive war on European soil since World
War II. At the same time, the rise of inflation—which was previously considered a transitory
phenomenon by most central banks— proved not so transitory after all. Canadian inflation
peaked at 8.1% by mid-year and eased to 6.8% in November, a far cry from the Bank of
Canada’s 2% target. Similarly, inflation peaked at 9.1% in the US, 3.8% in Japan, 10.6%
in the Eurozone, and 14.2% in the UK.
Central banks had to combat massive inflation for the first time in 40 years. The Bank of
Canada increased its key interest rate from 0.25% to 4.25%, and the US Federal Reserve
raised its “Fed Funds” target rate from 0.25% to 4.50%. Bond yields followed the same
upward trajectory. The 10-year Government of Canada bond yield rose from 1.43% to
3.30%, and the 10-year US Treasury note yield increased from 1.51% to 3.87%. These
rate increases caused significant bond price declines, especially for long maturities.
The tremors of the bond market drove global stock markets down. Growth stocks were
particularly hit hard, while value stocks incurred more modest losses. Energy (+44.3%)
was the best-performing global sector, while information technology (-25.8%), consumer
discretionary ( -26.6%), and communication services (-30.6%) were the worst performers.
Here are our observations on asset-class returns in 2022:
• Short-term and total market Canadian bond indices produced returns of -4.0% and
• Short-term and total market global bonds (hedged to the Canadian dollar) delivered
returns of -4.6% and -11.5%, respectively.
• Canadian stocks delivered a return of -5.8%.
• US stocks returned -13.3% in Canadian dollars and -19.2% in US dollars.
• International developed market stocks returned -8.2% in Canadian dollars and -7.0%
in local currencies.
• Emerging market stocks returned -13.9% in Canadian dollars.
• The US dollar has appreciated relative to the Canadian dollar. This explains the higher
CAD returns on US stocks compared to local currency returns.
• Large-cap stocks outperformed small-cap stocks in developed international markets.
The returns of large and small stocks were similar in Canadian, US and emerging
• Value stocks massively outperformed growth in all markets.
What made 2022 so unusual is that stocks and bonds both produced negative returns. This
has seldom occurred in the last 40 years. While 2022 returns have been negative for PWL
investors, losses were partly cushioned by US dollar assets, less volatile short-term bonds,
and value stocks. While lower stock and bond prices are never good news in the short run,
they most often translate into higher expected future returns. In investments, the name of
the game is to focus on the long term, stay disciplined, and avoid speculative behaviour. In
2023, as usual, the PWL formula for a robust portfolio will be risk management, portfolio
diversification, and avoiding unnecessary costs and taxes.