Economic & Market Outlook for 2022
The United Nations is forecasting global economic growth at 4.0% for 2022 while most forecasters have US GDP growth somewhere between 3.5 and 3.8%. These forecasts come in above the long-term trend but much lower than the 5.7% we saw in the US last year. At least part of this reduced growth is attributable to the inflation that has remained high across most economies and is expected to remain higher than normal because of the highly competitive labor market and supply chain restraints. Reduced growth is also likely given the reduction in stimulus from the fiscal policy as the pandemic support packages are gradually removed. While COVID-19 was the primary story in 2020 and 2021, we expect it to take a back seat this year to the Fed’s monetary policy, which most economists believe will be more crucial to the economy in 2022. Central banks across the globe, and in particular here in the United States, will be trying to balance raising interest rates enough to slow down inflation without overshooting and derailing the economic recovery. It is a balancing act that historically the Federal Reserve has not done such a great job at.
Most of the investment banks and custodians we follow (JP Morgan, Fidelity, Schwab, and Vanguard) are calling for lower returns for US stocks in 2022. Given that the S&P 500 has had returns of over 18% for the past three calendar years, it is probably not a bad thing or a surprise.
All four of the aforementioned custodians are also calling for increased volatility. 2021 was a year marked by almost no volatility in the stock market. In fact, the biggest intra-year decline for 2021 was only 5%. This pales in comparison to the average intra-year decline of almost 14%, even in positive years.
In fact, we have already seen increased volatility and a 10% decline in the US stock market in January 2022.
Increased volatility and market declines do not necessarily mean the market is going to continue to go lower.
CRA Financial’s Investment Committee still has mid to high single-digit returns in our 2022 base-case forecast for the S&P 500 by the end of the year. While valuations are not cheap at current levels, with an S&P 500 price to earning’s ratio of 19.2 vs a historical average of 16.0, they are not outrageous by any stretch. Stocks have also historically performed well in periods of rising interest rates.
Whether you look at the household debt service ratio, which is the lowest it has been in almost 40 years, or household net worth, which has climbed substantially over the past three years due to the stock market and home values, the consumer is in really good shape. Combine that with average wage growth in 2021 of around 4%, the highest that it has been in more than a decade, and the consumer seems able to continue to spend.
The markets may also benefit from the so-called “TINA” (There Is No Alternative) environment we find ourselves in when it comes to investing. Cash is essentially a non- earning asset and bonds finished negative for 2021, down 1.5 %, and are already down 2% year-to-date through the end of January 2022. Bond prices fall when interest rates rise so this decline is due to the anticipation of the Federal Reserve raising short-term interest rates this year. While the beginning of 2022 proved to be a tough start for investors, it’s important to maintain discipline and take a longer-term approach. Having a diversified and well-balanced portfolio remains your best strategy to help you maintain investment without taking unnecessary risks.
CRA INVESTMENT COMMITTEE
Matthew Reynolds CPA, CFP®
Thomas Reynolds, CPA
Robert T. Martin, CFA, CFP®
Gordon Shearer Jr., CFP®
Jeffery Hilliard, CFP®, CRPC®