2022 Outlook: Hot, Crowded and Flat
The development of vaccines to combat COVID-19 was a game-changer in 2021. By the end of the year, nearly 245 million Americans had received at least one dose, more than 200 million were considered fully vaccinated, and 70 million had been given a booster. As a result, as we predicted, the economy was reinvigorated as U.S. markets outperformed international markets.
But we also correctly foreshadowed the reemergence of inflation. With too much money chasing too few goods and too much demand with too little labor supply to meet that demand, we felt inflation would be a force that policymakers and investors would have to contend with for the first time in a long while.
So, where does that leave us looking ahead to the rest of 2022?
Here are Key Takeaways From the 2022 Outlook:
- The Fed has signaled that it will raise interest rates as many as three times in 2022, indicating that the Fed now views inflation as a more significant economic threat than COVID-19, and it is acting accordingly.
- Some of the forces that previously kept inflation in check, such as globalization, innovation, and demographics remain in place, although perhaps some of their influence may have peaked.
- Stocks will continue to outpace bonds, but returns likely will be bumpier than 2021. We believe that bonds can act as an effective hedge against deflation, but if inflation persists and the Fed is compelled to act more aggressively, bonds may no longer be seen as providing risk-free returns. Our bias toward high-quality cyclical stocks remains.
- A reemergence of equity market volatility may be sparked by the shift in the Fed’s policy, ongoing supply chain challenges, ripples from China’s ongoing real estate deleveraging, or an exogenous shock such as a geopolitical event. Equity investors should remain disciplined, flexible, and place a premium on selectivity.
- COVID-19 could throw the economy another curve, but the newest variant, omicron, appears to be highly more transmissible than delta but also much less lethal. If this holds true, omicron could become the dominant variant, infecting many but killing fewer, leading to herd immunity and allowing all of us to return to relative normalcy.
The bottom line for 2022: In the first half of the year, we see inflation remaining elevated before losing some momentum in the second half but staying above the Fed’s inflation target of 2%. Accordingly, interest rates will rise, and other forms of monetary support will be withdrawn.
Download the complete outlook report below.