2022 Market and Economic Outlook
2022 Market and Economic Outlook
By: Stacey Nickens
As of close on January 27, the Dow Jones was down 6%, the S&P 500 was down 9.2%, and the Nasdaq was down 14.7%. Such steep losses have many investors wringing their hands. Is this the beginning of a persistent market downturn? What will happen to my hard-earned savings?
While these drops may feeling daunting, a stock market correction is often a normal component of our current economic cycle. Knowing this, let’s look at the country’s current economic backdrop as well as discuss some themes we may see play out in 2022.
The United States is currently in a mid-cycle. After a recession, the economy enters an early-cycle, in which monetary policy is easing and interest rates fall accordingly. We saw such early-cycle trends in 2021, in addition to other markers of an early-cycle: growing corporate earnings and increased consumer spending. The economy has now entered a mid-cycle. The mid-cycle is the longest cycle and is characterized by continued, but slower, economic growth. It’s likely that companies will continue to grow, but many businesses will also be challenged by wage and cost pressures as well as labor shortages.
After a period of easy monetary policy, mid-cycles are often marked by normalizing monetary policy. The Fed is already discussing multiple interest rate hikes in 2022. These interest rate hikes would help combat inflationary pressures. Inflation should accordingly ease over the next year, but higher prices may dog certain categories, including housing and food. Both housing and food tend to experience more persistent inflation and currently account for a larger portion of rising prices. Additionally, the labor market is likely to benefit from more workers returning to the work force. Even still, worker shortages will likely push strong wage growth, such that inflation will not be able to drop below a certain level.
Of all the economic cycles, mid-cycles tend to see the most stock market corrections. The stock market will drop from 10-15%, but these corrections are often short-lived. On average, mid-cycle corrections last around 3 months. Overall, the market tends to be more volatile during mid-cycles, as we’ve already seen at the beginning of 2022.
These trends suggest that portfolio diversification is the name of the game in 2022. Many individual company stocks will likely experience volatility as a result of price pressures, labor shortages, and tightening economic conditions. Holding more companies in a variety of industries will help protect portfolios from being significantly impacted by individual company volatility. Investors could also look into balancing growth stocks with value stocks, which could reduce the overall risk and volatility within their portfolio.
Investors will also benefit from normalizing and preparing for market volatility. As discussed, market volatility is a natural component of our current economic cycle. Knowing this, investors should take preemptive steps to protect their investments. Diversification and risk reduction could be a few of those steps. However, investors will also need to take steps to make sure they aren’t their own worst enemies. A reactionary investor may sell stocks at their lowest valuations and miss out on market growth after a correction. Such behavior can seriously inhibit a portfolio’s long-term returns. To avoid being such an investor, consider these three stock market resolutions for volatile market moments. Additionally, it may be helpful to write down and remember the following quote:
“Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.” – Benjamin Graham
