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‘Tis the Season: 2022 Market Outlook

By: Mark Paccione, CFA, CFP®, BFA™
4 Minute Read

The time has come for investment professionals to offer their forecasts for the year ahead. The following three predictions have been somewhat repetitive for the last few years:

  1. Interest rates will rise
  2. Expect more volatility in the coming year
  3. Expect “new normal” stock and bond returns that are lower than long-term averages

It feels like these have been annual consensus beliefs since the Great Financial Crisis (GFC), and they certainly feel like rational, intuitive beliefs. Unfortunately, markets often don’t act “rationally.”

In 2021, only one of the three consensus views turned out to be true. Interest rates did move higher with the U.S. 10-year Treasury yield increasing from 0.9% on 12/31/2020 to 1.5% on 12/31/21. As a result, the Bloomberg Aggregate Bond Index was down -1.5% in 2021.

The other two consensus predictions were off by a wide margin. The largest pullback in the global stock market, as measured by the MSCI All Country World Index (ACWI), was -5.8%, while the ACWI index ended the year up 18.5%.[1]

Looking ahead, all three consensus beliefs make logical sense for 2022, which should give us pause. Rather than make outright predictions, let’s focus on three important themes for 2022:

  1. Inflation
  2. The Federal Reserve
  3. China

Inflation

We believe the most critical question to the markets is inflation, (the general rise in prices for goods and services), and believe the most important trend right now is the divergence between U.S. Consumer Price Index (CPI) year-over-year change and the U.S. 10-Year Treasury Rate:

 

Inflation is running hot right now with the latest CPI reading over 7%. While interest rates, as measured by the U.S. 10-year Treasury yield, have increased to start the year, we would expect interest rates to be much higher if inflation were to remain at these elevated levels.

We believe lower-than-expected interest rates and the 2021 increase of the trade-weighted U.S. Dollar Index are indications that the current inflation rate is temporary. Over the long-term, we believe the chart above will resolve itself with interest rates moving higher and inflation rates moving lower.

The Federal Reserve

We believe low interest rates and the expansion of the Fed’s balance sheet have been a significant contributor to rising stock markets and asset prices since the GFC. The Fed has communicated that it will begin to raise rates later this year, and at some later date, begin to shrink its balance sheet.

The last time this happened was 2018, and it is believed to be the cause of the significant selloff in the fourth quarter of that year, which did not stop until the Fed reversed course. We do believe the Fed wants to avoid a repeat of 2018 and will thus begin raising rates but delay shrinking their balance sheet until 2023.

While the Fed will take a more gradual approach than 2018 and monetary conditions remain accommodative overall, rates are set to increase and the Fed’s balance sheet will eventually begin to shrink, so what was a big tailwind will turn into a headwind.

China

As we mentioned in Q4 2021, we believe one of the most under-appreciated stories in the global market is recent developments in China. President Xi Jinping has taken steps to reverse the economic liberalization policies that have been critical to China’s growth over the past 20 years.

We think this development along with other actions, like the removal of presidential term limits in 2018, are precursors to Jinping establishing himself as president for life. While many are concerned about a future invasion of Taiwan that could potentially lead to war with the U.S., we believe the more likely market risk is that China ceases to be an engine of global economic growth and source of profits for multi-national firms.

Conclusions and Takeaways

The New Year is the time to review your investment portfolio and make adjustments for 2022 based on current market conditions. Assessing if major changes are needed to your long-term term plan and portfolio is critical.

If your financial plan is up-to-date, make sure the investment portfolio aligns with your goals. Many investment portfolios are overweight on stocks and other risk assets given the rally in place since the pandemic lows of March 2020. It may be an opportune time to work with your financial advisory team and consider rebalancing your asset allocation.

If you have upcoming spending needs and your liquidity bucket is low, it may be a great time to raise cash. If you have too much cash and have been waiting for the next market crash, now may be a good time to explore long-term investment opportunities with favorable risk-reward characteristics independent of market timing.

As always, If you are interested in reviewing your portfolio, discussing potential actions, or exploring what Curi Capital can do for you, please reach out to a member of our team at 984-202-2800.

Please note: This material should not be considered a recommendation to buy or sell securities or a guarantee of future results. Curi Capital is a registered investment advisor. Registration does not imply a certain level of skill or training. More information about Curi Capital can be found in its Form ADV Part 2, which is available upon request.

 Past performance is not a guarantee of future results. All investment strategies involve risk and have the potential for profit or loss; changes in investment strategies, contributions, or withdrawals may materially alter the performance and results of a portfolio. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio. References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and indexes do not reflect the deduction of the advisor’s fees or other trading expenses.

 Curi Capital clients should contact the Company if there have been changes in the client’s financial situation or investment objectives, or if the client wishes to impose any reasonable restrictions on the management of the client’s account or reasonably modify existing restrictions.

[1] Source: Y-Charts

Mark Paccione, CFA, CFP®, BFA™

Mark Paccione is Curi Wealth Management, LLC’s, Chief Investment Officer, based in Raleigh, NC.

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