2021 proved to be a flagship year for U.S. equities. The Vanguard Total Stock Market ETF (VTI) gained 25.67% for the year, propelled by easy monetary policy and surging corporate profits.
Despite the variety of headwinds caused by the pandemic, the surprising performance is an excellent reminder of how difficult it is for someone to predict where markets flow consistently. That’s why there’s no better time to discuss economic recovery and wealth management with a financial advisor.
The primary engine that powers corporate earnings, consumer spending should remain robust in 2022. However, inflation has come in consistently higher than projected for several months in a row, forcing the Federal Reserve to tame it.
Additionally, another spike in COVID cases and the political uncertainty that accompanies a midterm election year are notable headwinds on their own, even if there were no inflation concerns.
Here’s a snapshot of the market as we wrap up January 2022 and head into February.
January 2022 Stock Market Performance
So far, the S&P 500 is currently down more than 10% in January to kick off the new year.
The sell-off is mainly attributed to concerns of tighter Federal Reserve policy needed to combat inflation and the current tensions between Russia and Ukraine. Given the stretching of valuations throughout 2021, it’s not surprising to see quick and sizable drawdown inequities.
As this month comes to a close, all eyes will continue to be on any news about the Fed’s monetary policy and the potential military conflict on the Russia/Ukraine border, with the stock market poised to move significantly on both positive and negative news.
February 2022 Stock Market Preview
Investors are currently pricing in four interest rate hikes in 2022, which the Federal government would use to curb inflation. When interest rates rise, borrowing costs increase, and business investments decrease, resulting in a dampening of economic growth. Bond yields will also rise, making bonds a more attractive investment opportunity. All of this spells tough sledding for equities.
If investors monitor Wall Street and decide to rotate money out of stocks and into bonds, prices will fall. As the government gradually increases interest rates, corporate profits may begin to flatten, and valuations will shrink – especially for tech and other high-growth stocks.
Do you own a business? Good news: The business-friendly environment we’ve been experiencing is projected to continue on throughout 2022.
A shift in the way people want to work, increasing labor productivity, lower input costs, and myriad other factors could continue to bring Americans more money to spend at their favorite businesses. The economy should continue to expand, all else equal.
That said, if you’re planning on making investments (or need to take out a loan for any other reason), start talking to banks now. When the Fed begins raising interest rates – the first hike is expected in March – your borrowing costs may rise overnight. Even if you’re not ready to use the money right away, it may be favorable to lock in today’s low rates.
Additionally, the economic expansion we have enjoyed since the 2009 Global Financial Crisis – with the exception of the initial COVID blip – has extended well beyond the average boom cycle. Theoretically, a contraction should have happened already, meaning we’re overdue for one now. The current economic climate doesn’t suggest 2022 will be the year it happens, but business owners and entrepreneurs should do what they can to prepare themselves for the cycle to take its inevitable turn lower.
The Value Premium and Current Valuations
As mentioned above, there are quite a few reasons for wanting to be in value stocks in the early stages of 2022. Here’s one more:
This image from seekingalpha.com shows the disparity over the last 10+ years of growth stocks outperforming value. Historically, value stocks tend to outperform growth over the long term slightly.
The disruption from the norm has mainly been caused by the rapid stretching valuations of tech stocks, sending the growth stock category roaring higher. A reversal of the recent pattern is overdue, and the 2022 headwinds may be the catalyst required.
Inflation and Monetary Policy
Without trudging into the economics behind what causes inflation, just know this: It’s too much money chasing too few goods. When the aggregate supply of money increases more rapidly than aggregate production and demand stay constant (or increases), aggregate prices must rise.
Beginning in March 2020, the Federal Reserve rapidly increased the total amount of money in the economy to combat the effects of COVID. Supply chains crippled, production fell way off, and consumer demand skyrocketed. It’s a recipe for booming inflation.
Despite the reopening of the economy, the excess money in the economy still exists and continues to lift prices higher. The government now has to slow those effects by raising interest rates and reversing their quantitative easing policies. This reversal in monetary policy is what investors in the stock market are currently trying to price.
Our central bank and global investors will likely dance through the end of 2022, with heavy spurts of volatility along the way.
As 2021 proved, it’s tough to predict the financial future. The best way to navigate uncertainty is to have a long-term, holistic financial plan with an investment portfolio customized to your situation and risk tolerance. Work with a financial advisor to plan wisely.
Armed with their tailored plan, patient investors vastly outperform their peers over the long haul. They can handle – and expect – volatility and do not make emotional decisions detrimental to their financial futures. Plus, they sleep better at night.