Where Do We Go? Oh, Where Do We Go Now? (Part I)
The year started off with a bang in the stock market. The Santa Claus rally did continue into the first two days of the year, as it traditionally does, but then the markets were hit hard mid-week when the minutes from the most recent Federal Reserve meeting were released, which showed the Fed is looking to take more aggressive action than previously indicated. If the first week is any indication, we are likely to see increased volatility this year. But where will the markets go? Will the economy remain robust? Will Covid ever go away?
Having the benefit of history to help guide us, while acknowledging what has occurred over the past few years is uncharted territory, we want to offer our predictions for what will happen with the markets and economy over the coming year.
The stock markets will have another positive year but it will not be as strong as the past few years. We begin with the biggest question on investors’ minds and what we expect for the stock market this year. Returns will be modest, more in-line with the long-term averages, but it will not be a smooth ride. Rising interest rates, slowing growth, and elevated valuations will lead to greater volatility and some losses at times, however…
The major stock market indices will NOT experience a 10% (or greater) correction. Despite the headwinds and greater volatility, there will not be a 10% correction. This is barring any unforeseen or unexpected major world events. Many of the underlying index components have experienced pullbacks of 20% (or more) from their highs in recent months but there has not been a broad market correction. Since many of the individual names have retreated and much of the news has already been factored in, we do not expect to see a larger overall market correction. However, corrections are a normal, healthy part of the market cycle and generally are short-lived so we will not be overly concerned if a broad market pullback were to occur. Even without a correction we are likely to see a rotation amongst sectors and styles with….
Value outperforming growth. With many growth stocks already trading at elevated price-to-earnings multiples and the prospect of higher interest rates, value stocks will finally have their day in the sun. The lines between growth and value can be somewhat blurred and some of the more established growth stocks will fare well. We still believe innovation from technology is a strong driver of the modern economy so there will not necessarily be a pullback but rather a slowing of growth and the realization that many value stocks are trading relatively cheaply. Speaking of innovation, we also feel that advances in technology are not only spurring growth in the economy but also creating greater efficiencies and helping mute inflation pressures, yet…
Inflation remains elevated but stabilizes. At the end of 2021, inflationary pressures were accelerating due to a variety of factors, namely supply chain constraints and higher input costs. The last outbreak of Covid has led to new labor concerns which will contribute to continued price increases, especially when paired with higher energy costs. The supply chain issues will eventually diminish but inflation will persist at some of the highest levels seen in three decades. Even if inflationary pressures were to fully abate and return to pre-pandemic levels, the price increases experienced over the past year have already worked into the system. In most cases wages and incomes have not kept pace with inflation so spending power has been eroded since the onset of the pandemic. Speaking of the pandemic…
Covid becomes an endemic. It seems most everyone is tired of hearing about Covid or even talking about it (we certainly are.) Unfortunately, the rapid spread of the Omicron variant has brought it back to the forefront as we near two full years of the virus impacting our lives. Each new variant is more contagious and capable of spreading faster than the previous, but the good news is the severity of the virus is decreasing. Undoubtedly there will be more variants and new treatments, but it is very likely the virus will never be fully eradicated and therefore will become part of life, similar to the common cold or the flu. This could permanently change certain aspects of our lives and what we’ve come to accept as normal but this will no longer be a major news headline and will have a lessening impact on the global economy.
By memorializing these predictions in print we are taking some risk since it provides the opportunity to look back a year from now to see how accurate we were. An unexpected, “black swan” event could alter these predictions, just as it would alter the course of the markets. Please join us for our Lunch & Learn on January 24th when we will discuss these topics in greater detail. Register here to join us in person at our Saint Louis Park office or register here to join us virtually.
We remain optimistic for continued strength in the markets and economic growth in the year ahead. Hopefully we have been too cautious in our forecasts and will be quite pleased if the markets perform better than expected. We continue to manage portfolios based upon where we think the markets are going but remain vigilant and willing to quickly make adjustments as market conditions change. We invite you to give us a call if you would like to discuss your individual portfolio and what might occur in 2022.
Wishing everyone all the best in the year ahead!
Nathan Zeller, CFA, CFP®
Chief Investment Strategist
Please contact us if you would like to review your individual financial plan or learn how the TaxSmart™ Retirement Program can help you.
Office phone # (952) 460-3260