Wealth Strategies

Sell The Rumor, Buy The News

For advisors, 2022: Sifting through the noise to find the truth of things

by Bryan Cannon

Mr. Cannon Is CEO and Chief Portfolio Strategist with the Charlotte, NC tax and wealth planning firm Cannon Advisors.

The start of 2021 was categorized by some of the strongest growth and performance the US economy has experienced in decades. But as the COVID-19 pandemic raged on with the emergence of two new variants that posed further disruptions and challenges to global supply chain networks, the nation’s workforce experienced an unprecedented exodus of millions of workers, and inflation rates soared, the latter half of 2021 became fraught with speculation as economic performance slowed, bringing projections for the coming year with it.

Moving forward into 2022, investors, traders, and other financial professionals continue to carefully monitor trends that could pose additional challenges for the economy and shape its outlook throughout the new year. Concerns over inflation and the continued spread of the COVID-19 virus and its newest variants still run high, as do their impact on many consumer-centric industries, financial institutions, and key markets all over the world.

With so much uncertainty around these sectors and others, it’s imperative to remain focused in order to sift through the noise of headlines and formulate strategies using the most accurate information available. As the last year has shown us, projected upswings in forecasting coupled with one of the shortest yet sharpest recessions in recent memory will require meticulous attention to a multitude of external factors for any investments made to emerge profitable in the long run.

Inflation Concerns

Rising inflation has been at the forefront of many Americans’ minds for several months, with rates rising to 7.0% — its highest in 40 years — according to the Bureau of Labor Statistics. Because of this, the price of goods across numerous consumer sectors, including housing, gas, food, and more continued to steadily rise between June and December of 2021. The price of gasoline rose nearly 60% in November alone, with grocery store prices for goods like eggs, meat, and fish increasing 0.9% that same month.

In response to growing concerns over rising prices resulting from inflation, President Joe Biden released a statement this previous December. In his statement, President Biden claimed that the heightened inflation rate, “…does not reflect the expected price decreases in the weeks and months ahead, such as in the auto market,” and that rising inflation was a symptom exacerbated by the pandemic rather than one hinting toward a severe economic downturn.

Additional concerns over inflation were renewed after the Biden administration’s proposed $1.75 trillion infrastructure spending package, the Build Back Better bill, was seemingly struck down by the unwillingness of US Senator Joe Manchin (D-WV) to commit a vote to pass it through the Senate citing inflationary concerns. Despite these valid concerns, the US unemployment rate remains low and consumer spending high following the 2021 holiday season. Regardless, it can be surmised that these rates will fluctuate further into 2022, so you will likely need to adjust your strategy accordingly.

Interest Rate Increases And Tapered Bond Purchases

As inflation rates remain their highest in several decades, additional pressure has been placed on Federal Reserve officials to pivot their 2021 policy and raise interest rates in order to combat spreading concerns. With inflation still above the Fed’s goal and an economy still healing from the pandemic’s initial onset nearly two years ago, central bankers expected that interest rates would rise some three times throughout 2022 — the first potentially as soon as March — which, according to the New York Times, “…is when the Fed [expects] to wrap up the large-scale bond-buying program it has been using in tandem with low [interest] rates to stimulate the economy.”

Additionally, minutes released from a Fed policy meeting last December stated that, given individual participants’ outlooks for inflation, the labor market, and economy, “…it could be appropriate to begin to reduce the size of the Federal Reserve’s balance sheet relatively soon after beginning to raise the federal funds rate.” At the time of the December 14-15th meeting, the Fed was estimated to possess roughly $8.8 trillion on its balance sheet, a significant portion of which was accumulated during the height of the pandemic to help stabilize the economy. This balance is expected to decline as the Fed remarked it would “double the pace” at which it would taper its bond purchases in 2022 to some $30 billion monthly.

As unemployment rates continue to fall, it can be expected that resources of both material goods and skilled labor will subsequently improve...

Following the release of these notes, with greater probability that the Fed would raise interest rates as early as March this year, and coupled with that of the Fed reducing its standing in markets for long-term bonds, US 5-year and 10-year Treasury yields surged to their highest levels since April of 2021, though their curve sharply flattened. Economic markets responded almost immediately, with the S&P 500 index falling roughly 1.6% after the Fed’s meeting minutes were released. As such, it’s possible that additional dips in economic activity could occur throughout the coming year, especially with interest rates for 10-year bonds projected to reach a high-end range of 1.75%-2%.

Continued COVID-19 Concerns

The emergence of two new prominent COVID-19 variants, Delta and Omicron, has thrown a wrench into global economic relief initiatives. Due to these variants’ being recorded to spread much easier and faster than their viral predecessors, many countries have reinstated restrictions on both inbound and outbound travelers. Furthermore, those countries’ governing leaders are widely unwilling to relive the social, financial, and political fallout they experienced in 2020 brought about by the pandemic’s initial onset.

One silver lining regarding remaining concerns over the COVID-19 virus is that the US economy witnessed an average GDP growth of some 6.5% in 2021. This growth ultimately slowed towards the third quarter of last year, largely due in equal measure to rising inflation and lingering bottlenecks in global supply chain networks.

While it’s unlikely that the US economy will experience such growth in 2022, we can still expect to see spikes in its performance following cooldown periods stemming from the Fed’s projected tapering of bond purchases and raising of interest rates at several times over the next 11 months. Although, what remains to be seen is whether or not those spikes will be able to offset slowdowns in other economic sectors, both within and outside of the US.

Global Economic Slowdowns And The Market Outlook For 2022

The US’s economic growth throughout 2021 was nothing short of unprecedented. In spite of the continued spread of COVID-19 and rising inflation sending the price of many goods higher, businesses have struggled to match consumer demand across markets, further exacerbating challenges facing their supply chains. But as unemployment rates continue to fall, it can be expected that resources of both material goods and skilled labor will subsequently improve. When coupled with shifts in consumer behavior purchasing higher rates of services rather than material products, these factors could potentially spark additional economic growth in 2022.

According to Gene Goldman, the Chief Investment Officer for Cetera Investment Management, “economic growth is slowing from high growth rates caused by the huge rebound off the bottom of low economic output and massive amounts of fiscal stimulus,” even though he states that economic growth rates for 2022 are still projected to climb towards their pre-pandemic levels.

Goldman’s claim holds water, especially as global supply chain networks continue to slowly feel relief from the pressure placed on them by heightened consumer demand over the past two years. Furthermore, fears over rising prices in the US housing market are projected to ease as their annual appreciation declines to less than 6%, according to Lawrence Yun, Chief Economist for the National Association of Realtors.

Should these projections over the US housing market and broader consumer goods market prove true, granting Americans greater buying power than the year prior, it can be expected that 2022 will offer investors more leeway in regards to their strategies than was seen in 2021. With that said, however, many factors that could impact 2022’s economic trajectory have yet to be unobscured. Although the stock market’s growth in 2022 is not presently expected to be as robust as its two predecessors, if consumers remain healthy leading to further economic growth and if inflation begins to subside, it could emerge much healthier than expected.