The economy and markets: 2022 economy predictions
Key points to note
Monetary policy: carefully calibrated, data dependent
We think trying to forecast what central banks will do is the wrong approach. They are data dependent, and will use their policy tools — and their rhetorical powers — to calibrate an appropriate path for rates as the data come in. Investors should be prepared for a variety of outcomes. Hopefully central bankers are ready, as well.
Recession: not this year, but market risks remain elevated
Risks of a premature end to this young cycle have admittedly increased, given the steep path of interest rate increases we’re already seeing. But absent a major policy error or additional exogenous shock, we do not see growth turning negative in 2022. This leads us to see potential for the S&P 500 to hit a new all-time high before the year is out thanks to solid earnings growth. Note, however, that while most asset classes are currently trading at their most attractive valuations in several years, low interest rates and high price-to-earnings ratios still do not compare favorably to the prior decade (Figure 4). This means return expectations should be somewhat subdued when compared to the 2010s.
Absent a major policy error or additional exogenous shock, we do not see growth turning negative in 2022.
Inflation: high but peaking
Just what the global economy didn’t need: An energy price shock to give another boost to already white-hot inflation across developed and emerging markets. But March likely marked the peak for both headline and core inflation in most major economies, with many goods prices likely to fall outright and wage pressures showing signs of easing. Disinflation would be welcomed by policymakers and investors alike.
Long-term interest rates: a slower climb from here
Falling inflation would seem to go hand in hand with falling interest rates, but we expect 10-year government bond yields to rise further from here. While rates are already up considerably — and by much more than we expected — this is mainly due to higher inflation expectations. We expect real rates to rise as policy turns more hawkish and inflation moderates, producing slightly higher nominal yields by the end of the year.
All market and economic data from Bloomberg, FactSet and Morningstar.
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A word on risk
All investments carry a certain degree of risk and there is no assurance that an investment will provide positive performance over any period of time. Equity investing involves risk. Investments are also subject to political, currency and regulatory risks. These risks may be magnified in emerging markets. Diversification is a technique to help reduce risk. There is no guarantee that diversification will protect against a loss of income. Investing in municipal bonds involves risks such as interest rate risk, credit risk and market risk, including the possible loss of principal. The value of the portfolio will fluctuate based on the value of the underlying securities. There are special risks associated with investments in high yield bonds, hedging activities and the potential use of leverage. Portfolios that include lower rated municipal bonds, commonly referred to as “high yield” or “junk” bonds, which are considered to be speculative, the credit and investment risk is heightened for the portfolio. Credit ratings are subject to change. AAA, AA, A, and BBB are investment grade ratings; BB, B, CCC/CC/C and D are below-investment grade ratings. As an asset class, real assets are less developed, more illiquid, and less transparent compared to traditional asset classes. Investments will be subject to risks generally associated with the ownership of real estate-related assets and foreign investing, including changes in economic conditions, currency values, environmental risks, the cost of and ability to obtain insurance, and risks related to leasing of properties. Socially Responsible Investments are subject to Social Criteria Risk, namely the risk that because social criteria exclude securities of certain issuers for non-financial reasons, investors may forgo some market opportunities available to those that don’t use these criteria. Investors should be aware that alternative investments including private equity and private debt are speculative, subject to substantial risks including the risks associated with limited liquidity, the use of leverage, short sales and concentrated investments and may involve complex tax structures and investment strategies. Alternative investments may be illiquid, there may be no liquid secondary market or ready purchasers for such securities, they may not be required to provide periodic pricing or valuation information to investors, there may be delays in distributing tax information to investors, they are not subject to the same regulatory requirements as other types of pooled investment vehicles, and they may be subject to high fees and expenses, which will reduce profits. Alternative investments are not appropriate for all investors and should not constitute an entire investment program. Investors may lose all or substantially all of the capital invested. The historical returns achieved by alternative asset vehicles is not a prediction of future performance or a guarantee of future results, and there can be no assurance that comparable returns will be achieved by any strategy.
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