New Year New Struggles

2022 is certain to be more challenging for investors than 2021. So far it has started out that way with the S&P 500 pulling back about 6% from the recent highs from the end of last year. The Sevens Report neatly pointed out that in 2021 the pandemic was a net positive for the economy and corporate earnings. The amount of fiscal and monetary stimulus put in place to counteract the economic impact of Covid was astounding. But times are changing. Market tailwinds are being removed. The quicker-than-expected termination of bond-buying stimulus by the Federal Reserve and higher stock valuations are now part of the new landscape. And now, we must keep a keen eye on two key “rally busters” inflation and higher interest rates.

The result of these issues will be greater volatility in 2022, and harder earned gains. However, we feel there is a good chance there will be gains because of above-pre-pandemic economic growth. Corporate earnings should also be solid enough to push the market higher.

There are a wide range of projected estimates for GDP. Most are above the mediocre 2.0%-2.5% pre-pandemic readings. Capital Group sees GDP at 2.5%-3.0% this year; Our Federal Reserve projects 4.0% and the IMF forecasts 4.9%. It’s hard to be pessimistic about investments when projected growth rates fall between 3.0% and 5.0%.

Corporate earnings will revert to more normal levels in 2022. But if GDP comes in the range above, earnings will be impressive. It appears companies have sufficient pricing power and market share right now to navigate increasing price pressures. As long as inflation doesn’t blow up, earnings will be a continued positive factor for stocks.

With vaccines becoming more available and wide-spread, 2022 may turn out to be the year that Covid finally starts to fade. If this happens, it’s likely that some tailwinds for the economy will be removed that have helped stocks rise to the stratosphere. We feel growth rates, inflation, and earnings will return closer to their historical trend, and the consumer should continue to do their thing.

Demand for services will pick up as Covid restriction decline. Demand for goods will remain high. Businesses and investors will be able to absorb slightly higher rates, with a few rough patches along the way. We could see the S&P up mid to high single digits by year end with international equities up a little more. However, it is almost certain that volatility will be increased compared to last year.

We encourage clients to stay in their current allocations even when storms get rough moving forward. Market volatility is normal and to be expected at times. Market corrections (a pullback in the popular US indexes of 10 – 19.99%) happen on average every 18 months. The average correction is a 13% decline in the popular US indexes and last four months. If you have concerns with your current asset allocation or markets, please reach out to us. R.O.I. and its clients have been through many storms and we have always come out on top. We anticipate this to continue moving forward.