Stock market trends for 2022 | Invest 101


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This year has turned out to be a profitable year for investing in the stock market. The three major indices – the S&P 500, the Dow Jones Industrial Average and the Nasdaq – all set records in 2021.

But let’s put it in perspective. As the economy returns to full capacity, many uncertainties remain.

First, the new strain of coronavirus, the omicron variant, has laid a wrench in the prospects for a global economic recovery. Second, high inflation persists and, finally, what action the Federal Reserve will take on interest rates remains to be determined. The main concern is how these uncertainties, combined, will affect the stock market in the future.

What environment are we heading into in 2022 and how can investors position themselves for strong equity returns? Here’s what investors should keep in mind as the New Year approaches:

  • How Higher Interest Rates Will Affect the Stock Market.
  • Slower economic growth in 2022.
  • How to invest in stocks in 2022.

How Higher Interest Rates Will Affect the Stock Market

Fed Chairman Jerome Powell told Congress in late November that he suspected inflation could persist longer than expected. Markets are banking on about an 80% chance that the Fed will start raising interest rates by mid-2022 and about an 87% more chance of a rate hike by the end of the year , according to the CME FedWatch tool, using data. as of December 3, 2021. With inflation currently a problem, this puts pressure on the Fed to hike rates, but that decision ultimately depends on the strength of the economic recovery in 2022.

Rising interest rates are going to be a change for the markets. But that won’t necessarily hurt the appetite for investing in stocks. On the contrary, it could degrade the performance of certain segments of the market, particularly growth stocks, which would favor value-oriented stocks, says James Ragan, director of wealth management research at DA Davidson in Seattle.

Higher interest rates are a headwind for growth-oriented stocks, but not all stocks will react the same, says Don Calcagni, CIO at Mercer Advisors. Growth-oriented companies that trade at much higher valuations relative to their earnings should be under more stress than low-priced discounted value stocks, like some in financials and energy, he says.

It’s also important to understand that while the Fed may decide to raise interest rates in 2022 from their current near zero levels, the picture of COVID-19 could call that into question. This is why Calcagni says there will likely be a “slow rise” in interest rates. “At this time, it doesn’t look like we’re going to see a rapid rise in interest rates, and that will give the markets time to adjust.”

As the Fed raises interest rates, the market can be expected to experience volatility, but overall, pundits are bullish on stocks.

Slower economic growth in 2022

The US economy in 2021 was focused on economic recovery from the severe disruptions of 2020 and experienced robust growth for much of the year. The first quarter of 2021 saw GDP growth of 6.4% on an annualized basis and the second quarter GDP grew even faster, at 6.7%. But the expansion in the first half was followed by growth of just 2.1% in the third quarter. This decline is explained by lower consumer spending and bottlenecks in the supply chain.

The economic situation in 2021 was also disrupted by soaring inflation. Some of the catalysts for inflation included supply chain disruptions, an emerging labor deficit, and continued demand for goods and services – a combination that put upward pressure on prices.

The fastest rate of economic recovery has probably already taken place, and while investors can expect continued economic growth in the United States, it may not be at the same rate of growth as in the United States. 2021. Many of these current challenges will not go away in the short term. In the long run, investors should therefore be aware of these challenges in order to know how to navigate the markets.

Calcagni says investors will face a triple threat in 2022. “The real theme for investors in 2022 is that they must balance the risks to growth, inflation and interest rates,” he said. he declares.

While US businesses are expected to grow next year, they may not be at the same rate as in 2021. That said, investors are expected to expand to invest in the global economy given higher economic growth estimates. abroad. When we look at the economic growth forecast, there will be more growth in the economies outside of the United States.

Calcagni says there is greater potential for economic growth in markets outside the United States as the pandemic emerges. “We expect greater economic growth in Europe and Southeast Asia and South Asia than in the United States,” he said.

How to invest in stocks in 2022

What does this mean for stocks and where should investors look for opportunities? Experts say investors will want to look to sustainable businesses that maintain strong earnings and cash flow. They will be the companies best equipped for the particular risk factors of 2022.

“Investors should seek to orient their portfolios towards companies with high profitability, companies which can increase their margins, which have strong operational leverage, companies which can pass on price increases in their supply chains to their consumers” , Calcagni said.

Sectors that fall into this camp include finance, energy, and healthcare. Investors should look for companies with these characteristics and, most importantly, ensure that they have reasonable valuations. There are many ways to measure a stock’s valuation, but the main one to look for is a relatively low price-to-earnings ratio.

With the hurdles of 2022 in mind, an investment strategy for investors that will never go out of style and that is more important than ever is diversification. It is important for investors to diversify their portfolios in order to manage market risk and ensure that they capture growth in different areas of the market.

Since the size and market share of some of the largest US companies has grown so much throughout the economic recovery, investors may consider diversifying beyond the S&P 500.

To manage the risk of being heavily invested in a few select companies, according to Calcagni, investors should consider companies with small to medium capitalizations. He mentions the Russell 1000 or Russell 3000 exchange traded funds, which are index funds that track the performance of the Russell indices, which include a mix of mid and small cap stocks. Small companies tend to be riskier than large caps, but they can offer investors better returns over time.

Another area of ​​the market that investors should look for is non-US stocks. While US stocks have performed strongly throughout the year, with the S&P 500 rising more than 20% and US stocks outperforming non-US stocks in the past decade, experts say it’s time to add exposure to international equities.

Investing in non-US stocks today not only adds diversification to the portfolio, but there are also opportunities to buy at a discount. Since valuations are high in US markets, it makes sense to invest outside of the US

Calcagni claims that non-US stocks are valued more attractively and have greater potential for economic growth. “Valuations in these markets are discounted from 20% to 30% compared to their US equity counterparts,” he said.

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