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Seven Investment Trends to Watch in 2022

Badger Investment Group - Jan 11, 2022
The pandemic continues unabated, generating one mixed-signal after another and greatly complicating the global economic. The stock market, however, the party lasted all year long – not even dramatic inflation data could dampen the animal spirits.
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Think back to the beginning of 2021. People were ready for a successful economic recovery and a summer of love, all made possible by Covid-19 vaccines. Then the variants arrived. As 2021 draws to a close, the pandemic continues unabated, generating one mixed-signal after another and greatly complicating the global economic. The stock market, however, the party lasted all year long – not even dramatic inflation data could dampen the animal spirits.

 

Where does the stock market go now? The S&P 500 posted its fourth-best annual return in the last quarter-century at around 27% in 2021. The bad news is that when the S&P 500 gains > 25% in a year, it has never gained more the following year. The good news is the next year can still be good, being higher 85% of the time and up ~11% on average.

 

Investors begin 2022 facing familiar challenges as 2021, record-breaking numbers of Covid-19 infections and concerns about surging inflation, sound familiar? What’s new is that the Federal Reserve has promised to tighten monetary policy and focus on curbing high inflation. Here are seven trends to watch in 2022:

1. Markets are still being affected by the pandemic

There’s hope that 2022 is the year when normalcy returns, sending travel, commercial real estate and traditional retail stocks even higher – but we’ve heard this story before. As the calendar turns, Omicron’s emergence offers both short-term and long-term concerns. What about the following variant?

2. Federal Reserve rate hikes are likely in 2022

Stocks do well when the Federal Reserve keeps interest rates low, but the Fed’s zero interest rate policy days are numbered. Central bankers projected that they would raise interest rates three times in 2022 as the economy healed and inflation remained above the Fed’s target. Economists and investors think that those increases could begin as soon as March, which is when the Fed is now expected to wrap up the large-scale bond buying program it has been using in tandem with low rates to stoke the economy.

3. Inflation, inflation, inflation

Are you tired of hearing about inflation? It’s undeniable: U.S. consumers (and financial media) are fixated on inflation. Casual dismissals of high gas prices and supply-chain-related shortages as “transitory” won’t work in 2022. The course of inflation will be an even bigger story in 2022.

4. Supply chain solutions

Even if the pandemic ends, there will be no full-term recovery until supply chains smooth out and keep store shelves full. The Omicron variant isn’t making resolution of this issue any easier, guaranteeing that it will stick around in 2022.

5. The job market is still unsettled

The improvement in the job market was a major story in 2021. By November, U.S. unemployment had fallen to 4.2%, and the market has helped push wages higher but without productivity rising, this ultimately means higher per-unit labour costs and upward pressure on prices for consumers. However, the numbers present an incomplete picture of the real labour market. The U.S. still hasn’t regained jobs it lost during the pandemic recession and are millions of jobs short of where its pre-pandemic trajectory.

6. Chip shortages will continue

The ongoing computer chip shortage will continue to impact stocks, not just tech stocks. Many consumer durable goods have a computer chip, so the deficit is more significant than laptops. Even an early end to the pandemic wouldn’t necessarily end this dimension of the supply chain crack-up. Intel predicts the chip shortage will last into 2023.

7. Midterm elections

Perhaps the most significant uncertainty of 2022 is the midterm Congressional elections. The fight seems poised to be hyperpartisan, leading to unpredictable news, instability or even violence. That’s the kind of surprise that can spook investors. It’s also not new. The run-up to midterms often roils stocks, particularly when a power shift in Washington is anticipated.

 

The beginning of the year can be a good time to re-evaluate your investment strategy, asset allocation and your broader goals. If you would like to discuss this with a Financial Advisor today, click here!

2021 in Review

US equities up again in 2021

US equities were higher in 2021, with the S&P up for a third straight year. There were several big themes in focus. Covid vaccinations formed a vital piece of the bullish narrative, particularly over the first several months of the year. The most significant tailwind may have come from the continued expansion of central bank balance sheets and easy financial conditions. Fiscal stimulus was another widely discussed positive. Record earnings beats, driven by a better demand backdrop and resilient margins, also helped underpin risk sentiment. Some of the other bullish talking points revolved around profoundly negative real yields and their influence on TINA and FOMO dynamics, robust consumer and corporate balance sheets, corporate buybacks, and a heightened retail impulse. There were many high-profile headwinds this year as well. These included the ongoing Covid pandemic, the emergence of new variants, supply chain constraints, more persistent inflation pressures, the Fed's policy pivot, and longstanding concerns about stretched valuations and crowded positioning.

Vaccinations, stimulus, TINA the significant equity tailwinds

While 2020 ended with just under 12M Covid-19 vaccine doses administered, the figure surged to nearly 9B in late 2021. The Fed's balance sheet stood at nearly $9T in late 2021, up from $4.4T before the pandemic. This put the balance sheet at ~40% of GDP, well above the 15% seen after the global financial crisis. Congress passed a ~$1.9T stimulus bill in March that featured $1,400 direct checks, putting the total fiscal policy response to the coronavirus crisis at nearly 25% of GDP vs the ~10% decline in the economy at the height of the pandemic. It later passed a ~$1.2T physical infrastructure package that featured more than $550B in new spending. According to FactSet, S&P 500 earnings are expected to increase 45.1% in 2021, meaningfully above the trailing 10-year average growth rate of 5.0% and marking the best performance since FactSet began tracking the metric in 2008. TINA and FOMO dynamics seemed to be underpinned by deeply negative real rates and best evidenced by the $1T+ of global equity inflows in 2021, which according to BofA, exceeded the combined $785B of inflows over the past 19 years.

Covid headwinds linger, inflation concerns ramp

The lingering Covid pandemic remained a significant headwind on economic normalization, notably as new variants emerged. The Delta variant weighed on Q3 growth, while the Omicron variant presented another stumbling block late in the year, given its high transmission rate and ability to evade the standard two-dose vaccine regimen. The combination of the pandemic and unprecedented monetary and fiscal stimulus wreaked havoc on global supply chains, a dynamic that pressured both sales and margins. Supply chain constraints also played into what turned out to be one of the year's most prominent themes in terms of the pronounced shift in the transitory vs persistent inflation debate. This shift, highlighted by a 6.2% y/y increase in headline inflation in November, the highest in over 30 years, was a significant driver of the Fed's decision at its December meeting to accelerate/double the pace of its taper to $30B a month. In addition, the median projection in the December dot plot was for three rate hikes in 2022, up from half a hike in the September update, with another three rate hikes seen in 2023 and two in 2024.

Growth outperforms value, reopening names lag

Growth was a big outperformer vs value despite the broader economic normalization trend. Despite the ramp in regulatory scrutiny, big tech fared well with some continued focus on its leverage to structural growth and disruption themes. Alphabet, Microsoft and Apple all outperformed the broader market, while Facebook was mainly in line, and Amazon lagged. Nvidia was another notable gainer in a very strong semi-space. Reopening plays such as airlines, cruise lines and casual diners primarily underperformed. However, retail outperformed as a group. Autos, notably Ford and GM, and the homebuilders, were some of the other standouts in consumer discretionary. The vaccine names saw outsized gains. Pandemic winners tended to lag with Zoom and Pelton among the high-profile decliners. Meme stocks largely outperformed, with names like GameStop and AMC posting triple-digit percentage gains, fitting with the broader retail impulse theme. Energy was the best performing sector with oil boosted by favourable demand and supply dynamics. Investments banks underpinned the financials. Global miners, precious metals, credit cards, growth software, HPC, and biotech lagged.

 

CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA This document is for general information only, not intended to provide tax, legal or financial advice, and under no circumstances should be interpreted as a solicitation to act as a securities broker or dealer in any jurisdiction. All views are intended for general circulation only and do not have any regard to the specific investment objectives, financial situation or general needs of any particular person, organization or institution. All investors should consult with a qualified investment advisor or tax professional before making any investment decisions. Tax & Estate advice offered through Canaccord Genuity Wealth and Estate Planning Services.