By Tim Courtney, Chief Investment Officer
2021 proved to be a strong year overall, with markets reaching numerous record highs alongside a recovering economy. As we enter into 2022, however, stocks are more expensive and the Federal Reserve seems tired of being called a wallflower.
Between policy changes and ongoing pandemic concerns, here are three factors we will be closely watching at the beginning of this year:
1. Interest rates. The expectation for interest rates in 2021 was that economic growth would motivate rates to move higher after essentially dropping to zero in 2020. We saw this play out in the first three months of last year but have since watched rates dip and remain unresponsive to news that typically moves markets.
Now, the Federal Reserve has indicated a plan to begin raising rates to stave off inflation. In fact, after the December FOMC meeting, 12 out of 18 members expected three rate hikes in 2022.1 Interest rates, which didn’t blink at 7% inflation levels, have suddenly begun moving. We will be monitoring these rate conditions and how they might affect equity markets if they move meaningfully higher.
2. Inflation. Interest rates should be tied to inflation, although by remaining stubbornly low, they have provided no protection for investors over the last year. There is debate over whether inflation will return to relatively low levels or remain higher than it’s been over the last several decades. Markets, which weren’t prepared for 7% inflation, also aren’t priced for this inflation to last. If inflation remains above 2% either markets will be moving to account for it or investors will continue to absorb real losses.
3. Consumer health. Another factor impacting the economy is consumer health. Economic growth last year seems to be strong enough to carry over into 2022, supported by households and consumers. With household net worth at an all-time high, it appears consumers are relatively healthy. In the third quarter of 2021, household net worth grew $2.4 trillion to $144.7 trillion, marking the sixth consecutive quarter of growth.2 Portfolios have boosted this and home (and even some car) values have increased.
However, the labor shortage combined with pandemic-era government aid ending or being reduced, it’s unclear if this spending level is sustainable for consumers. Recent consumer confidence surveys were low, though higher than previous months3, which is not uncommon during times of inflation. We’ll be watching consumer health closely to gauge whether there is still enough strength there to power growth.
Despite 2021 being a year of challenges, it was also a year of growth and recovery. As 2022 begins, we are hopeful that growth will continue, though there may be headwinds to monitor as we make portfolio decisions.
As always, if you have questions, please contact your Exencial advisor.
- CNBC (12/15/21) — The majority of Fed members forecast three interest rate hikes in 2022 to fight inflation
- MarketWatch (12/9/21) — U.S. household net worth increases in sixth straight quarter, Fed data show
- The Conference Board (12/22/21) — US consumer confidence
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