New Year Outlook 2022 %sep

NEW YEAR MARKET & ECONOMIC OUTLOOK

December 31, 2021

2022 OUTLOOK – Welcome the New in 2022

As we are just hours away from the end of another year and anticipate what the new year will bring, it is time for my annual Outlook. I titled my 2021 Outlook, “Less Stress, More Fun in 2021.” My 2022 Outlook theme is “Welcome the New in 2022”. As I have done for as long as I can remember, I am once again happy to share my insights and forecasts for the global stock market and world economy for the year ahead. Here’s my highlights of what to expect in 2022.

What will be new in 2022? More new stock. New market trends. New Fed policy. New Jobs. New economic challenges. New consumer behavior, and most hopefully, New health.

2021 was a record year for new stock offerings. New public stock issues between IPO’s and SPAC’s (Special Purpose Acquisition Company) shattered the previous new public stock listings set in 1999. Expect that to continue in 2022. More new stock will go public. A couple of highly anticipated names are Impossible Foods and Instacart. 2021 was also the biggest boom for mergers and acquisitions in history. More than $5.6 trillion worth of deals were clinched over the past 12 months, ripping past the previous record of $4.55 trillion set in 2007. Expect the hot streak to continue in 2022 as cash-rich companies race to buy growth and boost their own valuations. Private-equity firms have a record $2.3 trillion of cash to spend.

Persistent inflation pressures will spark new trends in market sectors such as gold, oil, housing, and other real assets in 2022. The Consumer Price Index jumped to multi-decade highs in 2021. Overall, the cost of living is rising at the fastest pace in almost 40 years. Oil soared by roughly 80% in 2021 through November and gold, at around $1,800 per troy ounce, is still below its August 2020 high over $2,000. Expect both to hit new highs in 2022. At least through the first half of 2022, expect the housing market to climb to new highs. The continued combination of lower rates, easier lending standards, low supply and high demand will remain strong tailwinds.

The Federal Reserve Board and its decision-making committee, the Federal Open Market Committee (FOMC), has been at the forefront of investors’ attention seemingly everyday for the last decade and beyond. Even the Board’s chairman has been a topic of market speculation in 2021. We now know President Biden will let Chair Jerome Powell keep his job going into 2022. Expect the FOMC to announce new interest rate policy next year. My forecast for interest rates is they go higher sooner. Expect three interest rate hikes in 2022. 2022 will become known as the year of the beginning of the end of the easy money era.

Want a job? They’re plentiful now and will help wanted signs will still be posted in 2022. In late 2021 the jobs market reflected over 10 million job openings. Many will likely be filled in 2022, driving down the current unemployment rate. Employers, though, will likely have to offer more pay to fill them. I expect the fastest wage rate increase in a long time in 2022. This in turn will fuel higher inflation.

More workers making more money will result in more spending. That should be the story for consumers next year. What I expect to be new next year is where and how consumers spend. While wages will rise, the prices of goods and services could rise more. American consumers will likely shop more at discount stores in the year ahead. Assign this shift in consumer behavior to inflation. Transactions at Dollar Tree climbed 65% in 2021 compared to pre-pandemic 2019. I expect that consumer choice to stick in 2022.

The best for last on the new in 2022 list. New (good) Health. It will be two years in early 2022 since we first heard of the coronavirus. Sadly, more than five million people worldwide have lost their lives to Covid-19. Today, the Omicron virus variant is driving up Covid cases to record numbers. While this is NOT good, new GOOD health should be the best new year’s gift in 2022. We have a booster. We have antiviral drugs, and many millions of Covid vaccine doses. 2022 is hopefully the beginning of the end for the pandemic. This week the UN health agency chief expressed optimism that 2022 may be the year the world ends the acute stage of the Covid-19 pandemic.

2022 U.S. Stock Market Outlook

While no one, including me, has a crystal ball to see the future, it is safe to say 2022’s stock market action will not repeat 2021’s. But expect the price volatility, industry group rotation and stock earnings impact to continue. What is unlikely to repeat is the unprecedented speculation in the market and the narrowness of the major indexes leading to record highs. The S&P 500 recorded 70 record closes for the year, the most since 1995. To me, a better name for the S&P 500 for 2021 is the “S&P 5”. A handful of S&P 500 stocks delivered about half of indexes total return. We have not seen such narrow leadership carry the major index since 1999, and before that, 1969. Meme stocks, cryptocurrencies, SPAC’s and NFT’s were sources of a feeding frenzy for speculators in 2021. SO, what about 2022? The two “E’s” will carry stocks (some) prices higher in 2022. The E’s are earnings and the economy. I have always said, “Earnings are the single most important determining factor of stock prices.” Also, when forecasting stock market performance, I believe it is best to start with the economic cycle. We will be in a mid-cycle economic period in 2022, if not already. Over the last 60 years, the S&P 500 index was up an average of 11.5% during the 30 mid-cycle years, with gains in 80% of those years. On the earnings front, I expect the “market multiple” and S&P 500 earnings to carry the market (SP) above 5,000 in 2022. With an estimate of $235 for S&P 500 earnings and a multiple of near 22, the major index climbs over 5,100. While that would be result in another winning year for the stock market, the less-than-10% ROR would be far less than the last three years.

Overall, these are my asset class implications for 2022:

Equities outperform bonds. Rising rates can be good for stocks – bad for bonds.
Long-term bond yields should rise. A steeper yield curve will be a function of persistent inflation pressure and Fed action.
U.S. equities outperform international.
The rotation to value stocks continues, generally outperforming the growth class.
Small Cap stocks go up with interest rates – at least initially. In the twelve months following the first Fed rate hike over the last six rising interest periods, small cap stocks averaged a 16.6% return.
Real world looks more virtual. The “Metaverse” becomes more of a market reality.

U.S. Economy in 2022

As I noted in last year’s “Outlook”, the pandemic controls the U.S. economy. That could still be the case in 2022. We have seen heavy hand new virus variants have on the global economy. While we can expect the best, we have to plan for a pandemic induces economic slowdown in our investment allocations. There is likely to be headwinds than tailwinds for the economy in 2022. The trillions of dollars of monetary and fiscal stimulus are behind us. Supply chain challenges and inflation affects are in front. So are higher interest rates. Gross Domestic Product (GDP) will slow, but still grow fast. I expect greater-than 4% GDP growth in 2022.

I can’t think of a better way to close my 2022 Outlook than how I did last year… Whether global investments appreciate greatly and economies rebound strongly, or not, my hope for 2022 is we all have a healthy, virus-free, and happy new year!

Happy 2022! Enjoy the new.

Wishing You a Happy & Healthy New Year!
John