Kristina Hooper shares 10 predictions for markets in the new year, including her view that emerging market stocks could take market leadership over U.S. stocks.
- 10 predictions for 2022:
At the top of the list: The Omicron variant could change the course of the pandemic by the end of the first half of 2022.
- Investment resolutions for the new year:
It’s time to create, or revisit, your investment policy statement to make sure it reflects your goals for 2022 and beyond.
Oh what a year it’s been. We began last year with high hopes, given the rapid development of vaccines – and those hopes were realized. Several powerful engines drove global stocks – especially developed market stocks — higher: monetary stimulus, fiscal stimulus and the distribution of effective vaccines. In addition, global earnings growth was strong in 2021.
Inflation proved to be a significant issue in 2021. The re-opening of economies resulted in higher spending levels, driven by pent-up demand and elevated household savings. Continued waves of COVID-19 caused supply chain disruptions, exacerbating inflationary problems. However, for the most part, markets seemed to look through this.
2021: Markets in a nutshell
Stocks. Global stocks posted double-digit gains for the year. US stocks outperformed international stocks. Emerging market stocks posted relatively weak returns, dragged down by Chinese equities. The Hang Seng Index was the worst-performing major index as a series of regulatory actions intended to achieve China’s “common prosperity” vision caused a sell-off in these stocks.
Bonds. Core bonds underperformed non-core fixed income such as high yield and convertible bonds.
Alternatives. Real estate investment trusts and commodities performed well. Within commodities, energy and precious metals experienced strong gains while gold and silver fell.
Top 10 predictions for 2022
Here are 10 developments I expect to see in the year ahead:
1. The Omicron variant will be a negative force in the short run, exacerbating supply chain disruptions and aggravating inflation. Within a few months, however, Omicron is likely to be a positive force if it remains as mild as we have seen thus far. Because it is highly contagious, it appears to be crowding out the more dangerous Delta variant. While I am certainly no epidemiologist, it seems likely to rapidly move through countries, serving as a “de facto” immunizer (far faster than any vaccination program), which could mean the end of the pandemic by the end of the first half of 2022.
2. I expect emerging markets stocks to have a very bumpy start to 2022, given the spread of the Omicron variant. However, I believe that for the full year, emerging markets equities are likely to outperform developed market equities, including US equities. I expect emerging markets growth to accelerate while US and European economic growth decelerates to more normal levels. Unlike 2021, Chinese equities are likely to help drive EM equities higher in 2022, helped by a re-acceleration of China’s economic growth, thanks to monetary and fiscal stimulus.
3. I expect at least one significant geopolitical crisis in 2022 (Russia invading Ukraine is at the top of the list of possibilities), but believe that markets will shrug it off within days after it occurs. In recent years, only trade woes have had a lengthier impact on markets, and even then it has been relatively short-term in nature.
4. There is likely to be a US stock market correction in the first half of 2022, but I expect a relatively swift recovery. It’s been so long since we have had a sizeable correction that the odds of one have grown — and increasing the odds is the fact that the Federal Reserve is starting to normalize monetary policy in the first half of 2022 and may start to hike rates.
5. Global stock and bond market volatility should increase as the Fed begins to normalize monetary policy. But I believe the Fed has the potential to positively surprise with less tightening than markets currently expect.