Despite unprecedented economic, political and health challenges, the past three years have been very kind to US investors. In 2021, the S&P 500 Index gained close to 28%, supported by a projected 40%+ growth in corporate earnings compared to 2020’s earnings. While diversified portfolios have not matched the extraordinary performance of Large Cap US Stocks, 2021 was the third straight year of double-digit gains for many investors. Looking forward to 2022, we expect investment results will “revert to the mean” with lower returns for the full year.
On the bright side, 2022 could be the year the US puts the coronavirus pandemic in the rear-view mirror. The current variant, Omicron, has been shown to be more contagious but less severe. While more people are being diagnosed with COVID-19, a lower percentage of those infected are being hospitalized. We are hearing optimistic opinions about this being the last meaningful wave of the pandemic.
On the political front, 2022 is a mid-term election year. While Democrats are trying to pass bold new social and environmental programs, their narrow majority in the House and a 50/50 split in the Senate will likely thwart these ambitions. If history provides any guidance, Republicans are likely to regain control of at least the House and possibly the Senate. Investment markets generally favor gridlock in Washington as the economy is less likely to be disrupted by significant new legislation from our politicians.
Economic growth continues to rebound as the pandemic subsides, but future growth is facing some new headwinds. After averaging less than 2% annually since 2010, US inflation rose 6.8% in 2021, the highest annual rate since 1982. The US is also facing a labor shortage, partly because of the pandemic. Many older workers have chosen to retire earlier than expected and another large group of workers has decided to start their own businesses, leaving more than 10 million unfilled job openings in the US at the end of November. Supply chain bottlenecks developed in 2021, leaving shortages and causing price spikes in building materials, energy, cars, and many other consumer products.
The US Federal Reserve Bank’s two primary objectives are price stability and a high level of employment. The Fed Board has quickly changed policy in recent months in an effort to tame inflation. After buying $120 billion in bonds each month as recently as October, it plans to stop its Quantitative Easing programs by March 2022. And many economists are predicting two or three increases in the Fed Funds rate by year-end. These Fed policy changes may slow economic growth in 2022 and 2023.
Offsetting the economic drag of inflation and higher interest rates, consumers and businesses have amassed record cash holdings from government stimulus payments related to the pandemic and lower discretionary spending on travel and entertainment. If the pandemic winds down and the supply chain and employment market improve in 2022, US economic growth could be better than expected in 2022.
Investors with a meaningful allocation to Stocks have been rewarded handsomely over the past three years. Economic changes in 2022 are likely to cause some additional volatility so investors need to be prepared, financially and mentally, to stick with their investment strategy.
This article was authored by Christopher Borden, a financial advisor and Managing Partner located at Canby Financial Advisors, 161 Worcester Road, Framingham, MA 01701. He offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network®, Member FINRA/SIPC, a Registered Investment Adviser. He can be reached at 508.598.1082 or firstname.lastname@example.org
Disclosure: Certain sections of this commentary contain forward-looking statements based on our reasonable expectations, estimates, projections, and assumptions. Forward-looking statements are not guarantees of future performance and involve certain risks and uncertainties, which are difficult to predict. Past performance is not indicative of future results. Diversification does not assure a profit or protect against loss in declining markets. Investments are subject to risk, including the loss of principal. Because investment return and principal value fluctuate, shares may be worth more or less than their original value. Some investments are not suitable for all investors, and there is no guarantee that any investing goal will be met. This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Talk to your financial advisor before making any investing decisions.
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