Market Outlook 2022

EARNINGS, ECONOMIC GROWTH AND VACCINES PUSH STOCKS TO NEW RECORD HIGHS IN 2021

Stocks overcame headwinds during the past three months, including a resurgence in COVID cases and the Federal Reserve moving to end the current QE program to hit new all-time highs in the fourth quarter and produce strong returns for 2021.

Fourth quarter began with volatility, as in early October Washington showed little progress on extending the debt ceiling or providing investors clarity on future tax changes contained in the Build Back Better bill. That uncertainty combined with concerns over third-quarter corporate earnings sent stocks lower. Many of these issues were addressed by mid-October which eased investor anxiety. Additionally, most companies posted better-than-expected third-quarter earnings results and 2022 S&P 500 earnings expectations rose yet again.

Positive momentum continued in November, as the S&P 500 drifted higher on tailwinds of 1) Clarity from Washington, 2) Strong earnings, and 3) Declining COVID cases. Then on Thanksgiving, the World Health Organization declared the Omicron variant of COVID-19 a “variant of concern” and that caused a sharp selloff and the world braced for another surge.

Then in late November, Fed Chairman Jerome Powell surprised markets by stating that due to persistently high inflation, the Fed would accelerate the tapering of Quantitative Easing. That came less than a month after the initial announcement and caused markets to price in interest rate hikes in 2022. Concerns about future Fed policy combined with Omicron uncertainty led to declines in stocks late in November and the S&P 500 finished the month with a small loss.

Still, 2021 was another historic year for markets and the S&P 500 ended near all-time highs, as the governmental policy remained supportive of the economy, corporate earnings growth was strong, and progress was made against the pandemic through vaccination and advancement in treatments. All four major U.S. stock indices were higher for the fourth quarter and posted positive returns for the year.

Q1 and 2022 Market Outlook

Markets exhibited impressive resilience since the pandemic began and throughout all of 2021, as the strength of the U.S. economy and corporate America helped produce another year of substantially positive returns in stocks. That resilient nature should continue to support markets and the economy in 2022.

Still there are always potential challenges to economic growth, corporate earnings, and market returns, including stubbornly high inflation pressures, political uncertainty, and the ongoing pandemic.

First, global central banks, led by the Federal Reserve, have begun to reverse the historically accommodative policies that were enacted in response to the pandemic. In ending QE, the Fed expects to increase interest rates three times in 2022. That transition to more normal monetary policy will likely create headwinds on the economy and potentially corporate earnings, and while U.S. stocks have performed well during the initial phases of a Fed rate hike campaign, we will monitor the impact of rate hikes on economic growth and the corporate earnings outlook.

The Fed is more aggressive about removing these accommodative policies because inflation surged to 30-plus-year highs in 2021. Positively, rising inflation did not have a negative impact on consumer spending or corporate earnings in 2021. But that risk remains as inflation is expected to continue in 2022. As in 2021, we will monitor inflation to see if it becomes a negative influence on corporate margins and earnings, or consumer spending more broadly, because that can increase market volatility.

Despite these risks, powerful tailwinds remain on stocks and other risk assets. Corporate earnings remain strong and the performance of corporate America through the pandemic has been nothing short of amazing. Interest rates, while likely to rise in 2022, remain extremely low and well below levels that historically have been considered a headwind on economic activity. Personal savings remain high, unemployment remains low, and broadly speaking the U.S. economy is strong.

More broadly, as we consider the past year, one of the biggest takeaways is that a well-planned, long-term-focused and diversified financial plan can withstand market surprises and related volatility