The 2022 outlook for equity markets is sound, but it is unlikely that it will rival the incredible results of 2021.
The year that was saw an unrivalled level of government stimulus, record highs in household saving levels and stunning earnings growth across the board, as world economies highlighted their resilience in the second full calendar year of the pandemic. The S&P500 gained 26.9%, the NASDAQ 21.4% and the ASX200 11.05% for the year.
This was no small feat, as the market adjusted to a civilian assault on the US Capitol to reign the year in; watched on the sidelines as the rise of the retail internet trader’s ‘meme stocks’ caused major headaches for the US securities regulator and hedge funds alike; acclimatised to the realities of “Special Purpose Acquisition Companies” (SPAC’s); and navigated the pandemic’s evolution in both the Delta and Omicron variants.
On the other hand, 2021 highlighted significant supply chain disruption; concerning inflation figures; and questions on the sustainability of the artificial monetary policy support. The year to come, whilst still holding a COVID footnote, will need to address these issues for equity market confidence to remain, volatility to minimise and valuations to hold at their historical relative heights.
Inflation figures have been elevated by the disruption of global supply chains due to the practical nature of the virus and its isolation requirements; disproportionate labour supply and consumer demand requirements; the realities of outsourcing industries away from domestic sources; and the heightened level of savings and incredibly cheap debt that have allowed both consumers and companies to fund higher prices of goods and services.
Traditionally, higher inflation figures are addressed by monetary policy – increasing interest rates and taking money out of financial markets, and via fiscal policy – generally increasing taxes or reducing government spending. These tools reduce the funds that can fuel the demand of goods at higher prices. This is healthy within reason, and the US Federal Reserve have already flagged the likelihood of three 25 basis point (0.25%) increases to interest rates throughout the course of 2022 that will begin this process.
Optimistically, companies will look to meet pent-up demand for products and services as demand spreads throughout a full economic market that hasn’t operated as such since 2019.
The excess cash reserves of consumers will likely continue to support demand, as well as continue to flow into equity markets. It’s likely we will see further corporate merger and acquisition activity and share buybacks that will support equity markets.
The next 12 months has the opportunity to herald the full global recovery, with vaccination distribution addressing the pandemic, the resumption of global mobility and strong growth in consumer and corporate spending fueling equity markets to a positive year of returns.
If you would like to discuss investment options for 2022, please do not hesitate to get in touch with our Wealth Management team.
