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Kristina Hooper | January 4, 2022

Market predictions and investment resolutions for 2022

Kristina Hooper shares 10 predictions for markets in the new year, including her view that emerging market stocks could take market leadership over U.S. stocks.

Oh what a year it’s been. We began last year with high hopes, given the rapid development of vaccines – and those hopes were realized. Several powerful engines drove global stocks – especially developed market stocks — higher: monetary stimulus, fiscal stimulus and the distribution of effective vaccines. In addition, global earnings growth was strong in 2021.

Inflation proved to be a significant issue in 2021. The re-opening of economies resulted in higher spending levels, driven by pent-up demand and elevated household savings. Continued waves of COVID-19 caused supply chain disruptions, exacerbating inflationary problems. However, for the most part, markets seemed to look through this.

2021: Markets in a nutshell

Stocks. Global stocks posted double-digit gains for the year.1 U.S. stocks outperformed international stocks.2 Emerging market stocks posted relatively weak returns, dragged down by Chinese equities.3 The Hang Seng Index was the worst-performing major index as a series of regulatory actions intended to achieve China’s “common prosperity” vision caused a sell-off in these stocks.4

Bonds. Core bonds underperformed non-core fixed income such as high yield and convertible bonds.5

Alternatives. Real estate investment trusts and commodities performed well.6 Within commodities, energy and industrial metals experienced strong gains while gold and silver fell.6

Top 10 predictions for 2022

Here are 10 developments I expect to see in the year ahead:

  1. The Omicron variant will be a negative force in the short run, exacerbating supply chain disruptions and aggravating inflation. Within a few months, however, Omicron is likely to be a positive force if it remains as mild as we have seen thus far. Because it is highly contagious, it appears to be crowding out the more dangerous Delta variant. While I am certainly no epidemiologist, it seems likely to rapidly move through countries, serving as a “de facto” immunizer (far faster than any vaccination program), which could mean the end of the pandemic by the end of the first half of 2022.
  2. I expect emerging markets stocks to have a very bumpy start to 2022, given the spread of the Omicron variant. However, I believe that for the full year, emerging markets equities are likely to outperform developed market equities, including U.S. equities. I expect emerging markets growth to accelerate while U.S. and European economic growth decelerates to more normal levels. Unlike 2021, Chinese equities are likely to help drive EM equities higher in 2022, helped by a re-acceleration of China’s economic growth, thanks to monetary and fiscal stimulus.
  3. I expect at least one significant geopolitical crisis in 2022 (Russia invading Ukraine is at the top of the list of possibilities), but believe that markets will shrug it off within days after it occurs. In recent years, only trade woes have had a lengthier impact on markets, and even then it has been relatively short-term in nature.
  4. There is likely to be a U.S. stock market correction in the first half of 2022, but I expect a relatively swift recovery. It’s been so long since we have had a sizeable correction that the odds of one have grown — and increasing the odds is the fact that the U.S. Federal Reserve (Fed) is starting to normalize monetary policy in the first half of 2022 and may start to hike rates.
  5. Global stock and bond market volatility should increase as the Fed begins to normalize monetary policy. But I believe the Fed has the potential to positively surprise with less tightening than markets currently expect.
  6. I do not believe that the Fed will hike rates in March. It’s just too soon, especially given the spread of the Omicron variant. However, the Fed seems eager to start reducing its balance sheet.
  7. I expect cyclical stocks to outperform defensive and secular growth stocks in the U.S. early in 2022 in anticipation of a post-Omicron recovery, but that for the full year, growth will outperform.
  8. U.S. inflation is likely to rise further, especially given the spread of the Omicron variant and its potential impact on supply chains and labour, but it should peak by mid-2022 and then slowly decelerate.
  9. The 10-year U.S. Treasury yield will end 2022 higher than it is now, in my view, as the Fed begins to normalize monetary policy.
  10. Finally, I expect to see even more interest in environmental, social, and governance (ESG) investing in 2022, driven in part by a dramatic acceleration in electric vehicle adoption in the U.S., Europe, and China.

Investment resolutions for the new year

Here are four investment resolutions to consider for 2022:

  1. Let your investment policy statement be your North Star. For some, that means actually creating an investment policy statement. For others, it may mean revisiting it at the start of the year to ensure it still reflects their goals and current needs. (For example, a college may need to revise the annual amount it takes from its endowment for spending from 4% to 5% to reflect increased student financial aid needs.) Either way, the key is to do it in a “vacuum” rather than in response to a market event. That helps take the emotion out of decision-making. After all, some of the investors who were most negatively impacted by the Global Financial Crisis and the pandemic were those who got out of markets when stocks started falling, only to miss out on substantial rebounds. Investment policy statements help investors, both institutional and individual, stay the course and keep focused on long-term goals.
  2. Be well diversified. For many investors, it’s not enough to just have exposure to stocks and bonds — that leaves out the potential benefits of alternatives. And within all three major asset classes, it’s important to be well diversified. For example, within both equities and fixed income, many investors are under-exposed to emerging markets and may benefit from increased exposure.
  3. Rebalance your portfolio. Make sure you rebalance your portfolio at least once a year. That enables you to take profits and ensure you are within the parameters of your investment policy statement.
  4. Keep some cash on the sidelines. This gives you “dry powder” to deploy during substantial stock market drops. You may want to dollar cost average in the case of a stock market correction, although recent drops have been very short-lived so there may not be a lot of time to deploy a dollar cost averaging strategy.

A wish for 2022

Sadly, 2021 ended on a down note with the death of actor Betty White, a comedic icon for many generations, just a few weeks short of her 100th birthday. However, we can learn so much from the life she led. Here’s hoping that in 2022, we all channel our inner Betty White by living life to the fullest. We will finish the year older than we are today, but as Betty pointed out, everything gets better with age — except a banana. Here’s to a wiser, better 2022 filled with joy.

1 Source: MSCI. The MSCI All Country World Index rose 17.04% (in USD terms) in 2021. The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets.

2 Sources: S&P, MSCI. Based on the S&P 500 Index versus the MSCI All-Country World ex-U.S. Index. The S&P 500® Index is an unmanaged index considered representative of the U.S. stock market. The MSCI All Country World Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the U.S.

3 Source: MSCI. The MSCI Emerging Markets Index returned -5.68%, while the MSCI Emerging Markets Index ex-China returned 7.01%. The MSCI Emerging Markets Index captures large- and mid-cap representation across 26 emerging markets (EM) countries.

4 The Hang Seng Index is an unmanaged index considered representative of the Hong Kong stock market and includes the largest companies traded on the Hong Kong Exchange.

5 Core bonds represented by the Bloomberg Global Aggregate Corporate Index, a flagship measure of global investment grade, fixed-rate corporate debt. Convertible bonds represented by the Bloomberg Global Convertibles Index, which blends the three regional Bloomberg Convertibles Indices from the U.S., EMEA, and APAC into a single global benchmark for the convertibles asset class. High yield bonds represented by the Bloomberg U.S. Corporate High Yield Index and the Bloomberg European Corporate High Yield Index, which are unmanaged indexes representative of the high yield corporate bond markets in the U.S. and Europe, respectively.

6 Source: S&P. Based on the S&P Global REIT Index, a comprehensive benchmark of publicly traded equity REITs listed in both developed and emerging markets, and the S&P GSCI Index, an unmanaged world production-weighted index composed of the principal physical commodities that are the subject of active, liquid futures markets.

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The opinions referenced above are those of the author as of Jan. 3, 2022. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties and assumptions; there can be no assurance that actual results will not differ materially from expectations.