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Think back to last year. Everyone was ready for the booming economic recovery and summer of love in 2021, all made possible by the Covid-19 vaccines. Some were even saying that the end of the epidemic was imminent.
Then the delta and omicron variables arrived. As 2021 comes to a close, the pandemic continues unabated, generating one mixed signal after another and greatly complicating the global economic recovery.
But in the stock market, the party lasted all year long. The total return on the S&P 500 in 2021 was more than 27% – and not even dramatic inflation data could dampen animal sentiment. Not now anyway.
But observers are wondering how far the bull market can continue – barely breaking off as it did in the shortest bear market on record in early 2020. There are signs that the latest call may be around the corner – softened by other indications that investors still have money. Made in 2022.
Here are the top nine investment trends to watch out for in the new year.
1. Markets are still driven by the Covid-19 pandemic
In which direction will the epidemic winds blow? There is hope that 2022 will be the year things return to normal, driving up prices for travel, commercial real estate and traditional retail stocks — but then again, we’ve heard that story before.
Delta shattered the dream in 2021. As the calendar shifts, the emergence of Omicron raises concerns both in the short and long term. Even if this alternative does not result in another wave of fatal infection, what about the next? It is Mother Nature, not humans, that writes the end of this story.
Essentially, investors should realize that the post-Covid market rally is already there, even if the pandemic is not over yet. That’s because stock markets will likely have already priced most or all of the gains that can be expected from a fully reopened economy.
While there are still mandates for masks and flights remaining below pre-pandemic levels, many Americans have already returned to relatively normal lives, so even if luck turns and the pandemic finally fades sometime in 2022, there may be no greater room. much for it. The economy – or the stock market – to run.
2. Fed Rate Likely to Rise in 2022
Stocks do well when the Federal Reserve keeps interest rates low, but the days of the Fed’s zero interest rate policy (ZIPR) are numbered. The only question investors have to ask themselves is how many Fed rate hikes will happen in 2022.
CME’s FedWatch tool predicts at least two rate increases, based on how speculative speculators are in the futures market. Meanwhile, already planned cuts to the Fed’s monthly bond purchases – the so-called tapping – mean that quantitative easing (QE) will be over by spring.
Quantitative easing and rock-bottom rates have helped support equities since early 2020. But more bad news, like hotter inflation reports, could force the Fed to tighten monetary policy faster, and that will likely end badly for stocks.
3. Tired of hearing inflation? It’s going to get worse before it gets better
Undeniable: American consumers (and the financial media) focus on inflation. Occasional exclusions from high gas prices and supply chain related shortages will not work as “temporary” in 2022. The inflation trajectory will be a bigger story in 2022, and if current trends are not reversed soon, there will be market turmoil.
Higher interest rates and higher inflation are a recipe for Wall Street’s decline. However, it may indicate opportunities in the bond market or even provide some good news for savers in the form of higher APYs.
4. Supply Chain Solutions
Check out any US port today and you’ll see piles and piles of shipping containers waiting to be unloaded or refilled with goods. This is just one piece of advice that the supply chain challenge no longer seems like a short-term problem.
There may be some benefits that can come from supply chain issues in the long run. Americans for the first time in a long time are questioning the wisdom and national security implications of buying and making nearly all of our products overseas. this is good.
But in the short term, that could potentially be bad for the markets. Even if the pandemic ends mercifully, there won’t be a full-term recovery until supply chains fizzle out and keep store shelves full. Nor does the Omicron variant make solving this problem any easier, ensuring that it continues into 2022.
5. Recover, I hardly knew
The massive GDP growth of 2021 has often been underestimated in the media. In the first half of 2021, the US economy was cooking along with 6% quarterly increases in GDP. That’s not sustainable — and we found that in the third quarter, when growth fell to 2%.
That was an early indication that the reopening yield might have come and gone. A recovery is expected in the fourth quarter, but imagine if 2022 stabilizes with lower levels of GDP growth just as the Fed is really scared of inflation. This could be a risky combination for shareholders.
6. The labor market is still unstable
The marked improvement in the labor market was a major story in 2021. By November, unemployment in the US had fallen to 4.2%, and – as you’d expect – a tight market helped lift wages.
However, the numbers present an incomplete picture of the real job market. The US has not yet recovered the 22 million jobs lost during the pandemic recession, and there are millions of jobs short of where the pre-pandemic trajectory should have taken the labor market.
So why is unemployment so low? Much of the gap can be traced back to women who were forced out of the labor market while trying to deal with childcare, as well as their overrepresentation in industries that have been hit hard during the pandemic.
Fierce competition for workers has hurt companies with rising labor costs and recruitment challenges. These issues need to be resolved before the job market returns to normal – and even then, it will remain another handicap for many public companies.
7. Has FANNG stock lost its bite?
If you want a real indication that the stock market may be in a slowdown in 2022, look no further than FAANG stocks.
This is a Wall Street pseudonym for five tech giants who have been a driving force behind the bull market for years now, including Meta—formerly Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX), and Alphabet—the father of Google ( Google). Microsoft (MSFT) is sometimes replaced by Netflix, making the abbreviation FAAMG.
Last year, we predicted a turnover outside of FAANG, because the tech giants have run pretty fast so far through 2020. It turns out we’re only partially right. Microsoft and Google gained more in 2021 (bad), while Facebook and Amazon’s more modest 2021 gains actually underperformed the broader market.
In fact, according to Morningstar’s US Large-Mid Index, in 2020, FAANG shares contributed about 25% of total market returns. This year through late November, FAANG shares contributed barely 3% of market returns.
So FAANG shares weren’t a bad bet in 2021, but they did come close. Some analysts say it is inevitable that investors will go looking elsewhere for returns in 2022, which will benefit names like Tesla (TSLA). Can we suggest boring consumer goods with profit-enhanced returns as a place to rest while inflation creates uncertainty?
8. Where are the chips?
The persistent shortage of computer chips will continue to affect stocks — and not just tech stocks. Practically all consumer durables have a computer chip, so shortages are a bigger problem than laptops. Detroit parking lots are filled with nearly-completed cars right now, just waiting for rare computer chips that still need to be installed.
Even an early end to the pandemic will not necessarily end this dimension of the supply chain breakdown. Here’s just one example: So-called DSP chips, which convert analog signals to digital, essential for audio equipment ranging from podcast mixers to televisions to cell phones, are in short supply. Blaming a horrific fire at a Chinese factory in late 2020 has complicated the epidemic’s problems.
Intel says the chip shortage will continue into 2023. That might be a good reason to consider buying chipmaker stock — but it might also be a better reason to worry about the stability of most other consumer discretionary names.
9. Midterm elections
Perhaps the biggest uncertainty in 2022 will be the midterm congressional elections. Republicans are likely to do well, as the incumbent’s party loses seats in the midterm elections. However, the fight seems set to be highly partisan, which can lead to unexpected news, instability, or even violence. This is the kind of surprise that can scare investors.
Nor is it new. The run-up to midterm elections often rattles stocks, particularly when a shift in power is expected in Washington. Green Bush Financial’s analysis of stock returns in 1994, 2006 and 2010 — the last three times congressional bodies have changed parties — offers a clear warning.
The analysis found that “in all those three years when a shift in power was on the table, the stock market was either low or flat ahead of the November midterm elections.” However, all is not lost. Throughout the three years, the market rebounded after the election.
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