Market Outlook · December 17, 2021

Making Sense: 2022 Market Outlook

Brent Ciliano

CFA | SVP, Chief Investment Officer

Phillip Neuhart

SVP, Manager of Institutional Portfolio Strategy


Key Market Tailwinds and Headwinds

We believe there are five key tailwinds pushing the market as we head into 2022.

  1. Continued growth in corporate earnings. Corporate earnings growth has driven stocks this year, and we expect them to continue to drive market returns into 2022.
  2. There is no alternative. Low and negative rates have driven investors into risk assets as the only source of real return. As of today, we sit at the apex of that, with inflation running north of 6% and yields historically low.
  3. Omicron may not be as deadly or economically damaging as initially thought. We're now on our 15th variant of COVID-19, and the mindset is shifting from a pandemic to an endemic state. Consumers and businesses are becoming more adept in functioning in this new normal environment.
  4. Inflation pressures may be peaking. We're monitoring four key bottlenecks—supply of product, transportation, labor and energy. Today, none of these are close to being solved. But in three of the four cases, we believe we're seeing peak bottlenecks. Energy remains the biggest wild card.
  5. The overall economic cycle is broadly still positive. Nine of 12 economic sub-cycles are still positive, with five of those nine still expanding.

However, we also believe there are six market headwinds that may create market volatility.

  1. Easy financial conditions may be in the rearview mirror. In addition to the fiscal policy fade, the Fed has already embarked on the journey to unwind their monetary policy accommodation. This is occurring via the reduction in monthly bond buying, as well as expectations for a mid-2022 Fed funds rate lift-off.
  2. Slow downs are expected. Global earnings growth is expected to slow down. However, it's expected to stay above the long-term average.
  3. Very high valuations of both stocks and bonds. In some past cycles, the valuations of stocks and bonds have been inversely correlated in which one asset was expensive and another cheap, but currently both are very expensive.
  4. Rising rates. Are rising rates bad for stocks? Historically, the first Fed rate hike isn't detrimental to equities. On average, the S&P 500 is up 6.6% in the 6 months following the initial rate hike, with equities even rallying in the months leading up to the hike.
  5. Mid-term election year. Mid-term election years historically see heightened volatility and higher intra-year drawdowns compared to non-mid-term election years (-17% versus -12%), but also more significant recoveries.
  6. Geopolitical tensions (China/Russia/Iran, China/Taiwan). This is a wild card that we think is currently unaccounted for by the market and, as always, geopolitical tensions are difficult to price.

A final thought for the future

As we move into 2022, we're likely to see more volatility than we have in recent months. Remember, focus on what you can control. Work with us to build and follow a comprehensive financial plan, as we believe it's the preeminent key to success. Let us help you navigate what to own, when to own it, and how much of it to own.

Learn more about our thoughts on where the market goes from here and other topics on the full Making Sense webinar replay.

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