Shifting to a slower growth environment, but with plenty of room to run
It’s been nearly two years since COVID and economic lockdowns sent ripples through the global economy and supply chain network. Since then the US (and global) economy has not only rebounded, but catapulted into a new economic growth cycle spurred by massive amounts of stimulus, an insatiable consumer demand for goods, and strong household balance sheets.
As we head into 2022 the US (and global) economy faces a transition as fiscal and monetary stimulus no longer support growth, inflation is persistent, and COVID becomes less of a headwind to economic growth. At the same time consumer spending shows no signs of slowing and should provide the tailwinds necessary for economic growth, albeit at a slower pace.
We expect 2022 will be another strong year for equity markets, especially in growth stocks and large technology. Corporate margins may face pressures from higher input costs, but as supply chain issues subside we think corporate earnings will continue to improve. Throughout 2022 the restart of Fed rate hikes will be a key variable to watch, especially amid the combination of inflation and constant COVID variants.
For investors this means being tactical and taking advantage of COVID-related market volatility and dislocations. Equities, lower quality credits, and private investments (especially private debt and venture) should all continue to do well in this environment. We prefer US and developed markets over emerging, and suggest investors limit duration risk in their portfolios as the Fed hikes rates. Investing is a journey, and in environments like the one we are entering we suggest investors prepare for volatility and be ready to act opportunistically.
Five investment themes for 2022
As we look ahead to 2022 we see economic strength globally, anchored by a financially strong consumer. COVID-induced volatility is now an on-going reality for markets, and while many of the same risks that weighed on markets over the last 18 months remain, the combination of on-going consumption spending, inventory rebuilds, and COVID vaccinations/treatments gives us confidence in the ability for markets to move higher. Inflation, over-tightening by the Fed, and duration of supply chain disruptions remain risks, especially if supply disruptions linger past 2Q22.
These topics are encapsulated in our five investments themes for 2022 discussed below:
THEME 1: Inflation already happened and investors need to adapt
Inflation trended higher for all of 2021, and the Fed is now likely to hike rates in 1Q22
THEME 2: Economic growth rates likely peaked this cycle, but growth should persist
Stimulus support is rolling off
THEME 3: The Fed is hawkish and rates are going up
Markets now expect three rate hikes in 2022 (vs. zero earlier in 2021)
THEME 4: COVID-related market volatility is here to stay
COVID, Evergrande, energy and inflation all drove volatility higher in 2021
THEME 5: Stocks (and risk assets) remain more attractive than bonds
Risk assets have attractive risk/returns
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