Market Pulse

Market Pulse

January 03, 2022

In focus

Global equities crossed the finish line in 2021 with an impressive surge, ending the year within a percentage point of all-time highs. The S&P 500 saw a total return of 28.7% in 2021. Below, we highlight our expectations for the year ahead, as laid out in our 2022 Annual Outlook – Positive yet realistic.

  • The Economy – The economic trajectory since early 2020 has been determined by the COVID-19 outbreak and subsequent recovery through stimulus programs and vaccinations. We think 2022 will shift from a stimulus-led recovery to a business-led expansion. Strong consumers and a rebound in business spending support our optimistic view. Known headwinds, such as tighter policy from the Federal Reserve (Fed), geopolitical tensions, and potential policy shifts from Europe’s three largest economies (Germany, France, and Italy) could keep growth in check.
  • Equities – Equities powered through the 2020 earnings recession as multiples expanded on the heels of massive stimulus and optimism about growth prospects. This was validated in 2021 by 45% growth in S&P 500 earnings. This sets the stage for 2022, in which we expect modest price gains driven by earnings growth while valuations remain range bound. The trend for equities remains higher, but our view is this will be checked by deeper, more frequent drawdowns than we saw in 2021.
  • Fixed Income – In 2022, we anticipate a wide range of potential outcomes as inflation remains at 30-year highs and the Fed has clearly telegraphed their intention to tighten policy. Overall, we expect an upward yield bias in 2022, though with greater volatility as the Fed tapers its monthly asset purchases.

A look back

  • Global equities edged higher to close out 2021, finishing just shy of record highs. Investors’ concerns about the omicron variant have seemingly eased heading into the new year.
  • 10-year Treasury yields remain in their recent trading range, holding at 1.51%. Upward rate pressure from a tighter Fed will likely be tempered by periodic flights to quality due to increasing bouts of equity volatility.
  • The omicron variant is expected to have a more muted economic impact from prior strains, but surging new cases should not be underestimated.

A look ahead

  • Fourth quarter earnings season prepares to kick off with yet another 20% growth expected, validating recent gains.
  • Minutes from the December FOMC meeting will be released on Wednesday and should confirm the Fed’s resolve on tighter policy in 2022, a key market risk in the year ahead.
  • Economic releases: Markit & ISM Manufacturing & Services, Durable Goods Orders, December FOMC meeting minutes, Nonfarm Payrolls, Unemployment Rate, and Langer Consumer Comfort.

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