The 2022 Mindset
Within the market, 2021 can be considered a year of risk taking. Easy monetary policy and rapid improvements in economic conditions set the stage strong returns from higher risk assets such as commodities, high multiple stocks, high yield bonds, cryptocurrency and the new category of ‘meme’ stocks. The year concluded as the third consecutive year with roughly a 20% return for the S&P 500. For most investors, 2021 can be chalked up as a good year, with the lone black mark being bonds, which lost a modest -1.5%.
As we head into 2022, we expect to see a shift in the economic landscape as fiscal stimulus programs seem to have stalled out and the Fed has openly shifted toward a more restrictive policy of sunsetting its asset purchase program and preparing the market for a series of interest rate increases. The last few months of 2021 saw the market begin to react to this, however, we see the shift in sentiment and positioning continuing as we get further into 2022 once Fed expectations become reality.
How the market will play out given these shifting conditions is a bit unclear. History has yet to witness an environment where a central bank is winding down its quantitative easing program and starting a rising rate campaign while a pandemic continues to impair consumer and business activity. Saying exactly how market participants will react is not something we, nor anyone for that matter, can predict with precision.
Our comfort in the ability of investors to generate attractive long-term returns remains. The path of getting there, however, is less clear given a shift in economic policies and market conditions. As investors embark on 2022 we recommend a few strategies to help in navigating the year:
We enter 2022 on an optimistic tone. The economy enters the year in a strong position, corporate earnings have never been stronger, and there is a diverse set of opportunities that exist across asset classes. We are, however, losing the tailwinds of favorable fiscal and monetary stimulus and facing a headwind of tighter monetary policy. This is likely to create a shift in market behaviors. In light of these alterations, we have to face 2022 with a degree of humility and risk consciousness knowing the playbook is changing, while recognizing that long-term fundamentals remain attractive.
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