Randy and I do not make short-term stock market predictions. Why? Because even the “best” are wrong most of the time. Warren Buffett famously continues to say “neither I nor you are smart enough to predict where the stock market will be within a year from now.” However, we do like to share our thoughts as it pertains to the trends that will influence The Price Group’s decision making over the next 12 months.
Below are the primary trends that we believe could have the greatest impact on the economy and the financial markets in 2022.
Inflation
We expect inflation to be a major influence in 2022 primarily because of the politics involved. Inflation has reached a multi-decade high, and you could also make the case that the inflation measurement today is higher than reported given the exclusion of food and energy in the Consumer Price Index (CPI). Inflation is now a much higher concern for consumers, and 2022 is an election year. With that being said, we believe that inflation will continue to be present at a higher level but will dissipate in magnitude during the second half of the year.
Interest Rates
The Federal Reserve has indicated they will raise short term interest rates 2 to 4 times this year once they stop purchasing bonds (this purchasing activity has kept interest rates artificially low). We believe interest rates will move higher but will not get “out of control.” We continue to position our Fixed Income portfolios to be more interest rate agnostic (i.e. we are taking LESS interest rate risk that the overall bond market).
Profits of American Companies
2021 was a record year for corporate profits. This was due to strong corporate earnings but also temporary government spending. We expect corporate profits to continue to grow but not at the same rate we saw last year. Interesting statistic… when measured by PE ratio (price-to-earnings), stocks are cheaper today than they were at the beginning of 2021!
COVID
The most recent variant of this virus (Omicron) has been much less severe than previous variants. While cases are up, hospitalizations and deaths have been much lower. Experts are reporting that this variant does not cause pulmonary symptoms. We think that COVID virus will have less influence over our lives at the end of this year compared to today.
Biden’s Build Back Better Tax Plan
This massive tax plan has stalled, and no action was completed before the end of the year. It is still possible that the $1.5 trillion dollar plan gets passed, but we believe any “new” plan will be smaller and more watered down. Given that 2022 is an election year, politicians up for re-election will be more apprehensive to vote for tax increases.
Political Gridlock
With the November 2022 midterms right around the corner, we think the most likely outcome is a GOP wave. This would likely mean no income tax hikes and all legislation would need bipartisan approval to pass.
Health of Economy
Every quarter, we publish our Recession Dashboard which helps us better understand and communicate the health of the underlying fundamentals of the economy. At the present time, our 12 indicators continue to look positive. Be on the lookout for a blog post on this topic in the next few weeks.
Stocks We Favor
We continue to favor large multi-national companies with healthy balance sheets, good earnings, and the ability to pay (and hopefully increase) their dividends year-over-year. We think that dividend paying stocks could be even more attractive in 2022 as these types of companies have historically done a good job of passing price increases directly to the consumer. Also, in a year of more “normal” returns, the dividend translates into a larger portion of a stock’s total return.
Conclusion
Overall, we continue to think tailwinds for stock prices continue for 2022, but we certainly do not expect another robust year like 2021. Earnings should improve, employees should return to the offices, and productivity should recover.
We continue to believe that every family needs a wealth coach who understands and prioritizes holistic planning. Would you like to review your Live Well Plan? Perhaps you would like our team to help you create a personalized Live Well Plan? The Price Group is here to help.
About the Author
Matt Price serves as a Partner and Senior Vice President for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 11 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
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