Authored by: Thomas O'Mahony

Review of Market Performance: Fiscal Year 2022

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Fiscal year 2022 was a challenging one for public market investments. Rising levels of inflation across most developed and emerging markets saw central banks become more aggressive in their monetary tightening plans. This in turn saw correlations between bonds and equities become positive; bonds declined as a direct result of higher inflation and tighter policy, while equities weakened in response to the higher cost of capital. This chart book presents returns and other market metrics for fiscal year 2022.

War in Ukraine Dents European Growth Prospects

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The ongoing war in Ukraine has exerted a material impact on both global economies and markets, primarily via a steep increase in commodity prices, especially energy. Europe has been particularly affected due to its geographical proximity and the resultant dependence of many of its nations on Russian fossil fuels. This chart book reviews the hit to European growth associated with the war in Ukraine.

Review of Market Performance: Calendar Year 2021

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The global economy continued its road to recovery in 2021, as the most severe economic impacts of the COVID-19 pandemic gradually receded. There were fresh waves of infection during the year, but the public health actions taken to counter them were less economically damaging. In the meantime, fiscal and monetary policy remained at extremely accommodative levels, supporting strong risk-asset performance.

Inflation Pressures Central Banks to Begin Normalizing Policies

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This week, the Federal Reserve, the Bank of England, and to a lesser extent the European Central Bank all acted to tighten monetary policies. These tightenings came as inflationary pressures have surged in many countries and as other central banks have looked to rein in simulative policies. But, when combined with above-trend growth expectations next year and central banks’ likely cautious tightening approach, we suspect financial conditions will likely remain accommodative and supportive of risk assets.

The Dollar Finds Temporary Support

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The US dollar tends to appreciate during two broad economic regimes. One is when the US economy is materially outperforming its global counterparts, attracting capital looking to benefit from the superior US prospects. The other is when growth slows sharply, attracting safe-haven-seeking capital. This is the “dollar smile” model of the currency, and looking at 2022 through this lens suggests some dollar strength may be in store.