Independent Accountants' Investment Counsel Inc.

Quarterly Commentary



Inflation, the expectation of higher interest rates and of course the ongoing Covid-19 saga were all top-of-mind in 2021, and yet impressive corporate profits propelled worldwide markets to positive returns for the year. Can this bull market be sustained much longer? In this article we consider what lies ahead for the markets in 2022 and how we structure our clients’ investments accordingly.




Inflation began to show up as a concern early on in 2021. By the second quarter, inflation had risen well beyond the target ranges of central banks, but some analysts were suggesting this was temporary and transitory, brought on in part by the persistence of government stimulus and supply chain issues throughout 2020. Starting in the latter half of 2021, markets began to speculate that inflation was more permanently entrenched, and that wage inflation would follow. Central banks began reducing bond purchases and to consider interest rate hikes sooner than the market was anticipating. Market volatility settled somewhat following the Federal Reserve’s meeting in September, when U.S. Federal Reserve Board Chair Jeremy Powell provided reassurance that monetary policy will remain accommodative until the Central Banks’s goals on employment and inflation have been reached. Rounding out the final quarter of 2021, high inflation numbers persisted, climbing over 6% in the U.S. and up to almost 5% in Canada -- both well ahead of policy target levels.


Why has inflation persisted? Rising fuel (mainly gasoline), food, and manufactured goods costs are the main causes, impacted by strong market demand for products amidst constrained supply chains. Wages are trailing, but the shortage of workers, particularly in the service sector, is expected to push labour costs higher in the coming months. The Covid-19 Omicron variant, which is spreading rapidly in developed economies, could have further detrimental impact on the supply side due to job absenteeism and government-imposed shutdowns. Although labour market participation in the U.S., for example, picked up in the 4th quarter, there were still over 10 million job openings and about 4 million less Americans working than before the pandemic.


While we anticipate that inflation tempers somewhat in 2022, economists still feel that the conditions driving inflation will continue on into the new year.




Following the release of minutes from the December U.S. Federal Reserve Board meeting, markets appeared to become worried that the Fed will be less accommodative than previously assumed, including an accelerated tapering of bond purchases and increasing its overnight lending rate sooner than expected. As a result, investors should anticipate an increase in interest rates starting in 2022 (previously thought to be 2023 at the very earliest) as inflation becomes more entrenched. 




Corporate profits grew in 2021, in part driving the continued momentum for investors to purchase equities. Higher earnings than 2020 were anticipated; however, actual earnings in 2021 exceeded analysts’ expectations. The percentage of earnings estimates ‘beats’ climbed higher throughout 2021, providing continued optimism and a bullish economic outlook.


While corporate profit expectations in 2022 are generally expected to exceed 2021 earnings, we will be watching carefully for any trend in “earnings misses.” Covid-19 impacts, persistent inflation and rising interest rates certainly create a risky earnings environment as we head into the new year. 




We believe it is important, particularly in a strong bull market, to understand some of the cognitive biases we all possess that can lead to mistakes. To quote the investment legend Benjamin Graham: 


'In the short run, the market is a voting machine but in the long run, it is a weighing machine.'


In other words, in the short term, the markets can be erratic and irrational, often swayed by recency bias (follow the “winners” and the hype), but in the long term the markets will converge on a company’s fundamental value. In the long run, fundamentals matter. 


In 2022 we will continue to focus on fundamentals and the impact of external factors such as inflation, interest rates, Covid-19 and technology advancements on our investment decisions. We will continue our focus on companies with global reach that we believe can adapt to an inflationary environment, will grow in a robust economy despite the likelihood of rising interest rates and, in many cases, can maintain or increase dividend payment levels. We will also invest, depending on our client’s risk tolerance, in technology and other stocks that will benefit from emerging social, demographic and economic trends.


The low interest-rate environment will continue to be a challenge for wealth managers who have normally relied on a blend of fixed-income assets with equities (stocks) to mitigate market volatility while working towards their clients’ objectives. With interest rates at record lows and investmentgrade bonds and relatively risk-free assets failing to even keep pace with modest inflation, as well as a widening gap in the spread between traditional fixed-income assets and riskier assets, the traditional asset mix for each level of risk may no longer provide the returns our clients seek. The asset mix to earn an overall rate of return of 5% looks quite different today than it did ten years ago. This is particularly concerning given a historically wide gap between fixed-income yields and corporate earnings. Locking into long-dated fixed income yields in a rising-rate environment introduces additional risks. 


In this environment, we have begun to shift some weighting away from bonds to higher yielding asset classes including preferred shares, stocks, and alternative assets. Of course, this is always subject to consideration of each client’s tolerance and capacity for risk and relative need for income, growth and capital preservation.


We cannot predict what will happen in 2022, but should adverse conditions prevail, volatile markets can create ideal buying opportunities at cheaper entry points. We think the best way to allocate our clients’ capital is to maintain a cool head through uncertain times by investing in a diversified mix of high-quality securities for the long-term while staying focused on the fundamentals of each asset. 


IAIC Disclosures


All graph and chart statistical data contained in this report has been supplied by Refinitiv and National Bank Financial. Sources used by Refinitiv and National Bank Financial to compile the data include: Global Insight, Thomson Financial, CPMS, Bloomberg, S&P/TSX Index Services, S&P Index Services, TSX, NYSE, NASD, and company reports. The views and opinions expressed in this newsletter are based on historical company fundamentals and market statistics. No guarantee of outcome is implied and opinions may change without notice. Investors should not base any of their investment decisions solely on this report.


This report is produced entirely by Independent Accountants' Investment Counsel Inc. Although the information contained in this report has been obtained from sources that IAIC Inc. believes to be reliable, we do not guarantee its accuracy, and as such, the information may be incomplete or condensed. All opinions, estimates and other information included in this report constitute our judgment as of the date hereof and are subject to change without notice.


Please contact your IAIC representative if you have any questions regarding this newsletter.


©Copyright 2022 Independent Accountants’ Investment Counsel Inc. All rights reserved.


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