As we wind up 2021 and head into 2022, let’s review some of the investment and economic themes on my mind. Please keep in mind, I consider these thoughts to be informed opinions, but certainly not investment advice. I can’t recall a more confounding time to be an investor, and the volatile times ahead might be considered exciting or intimidating depending on one’s investment approach and goals.
First, COVID continues to dominate financial headlines as new variants and policy reactions emerge around the country. My opinion on the pandemic, based more on social observation than epidemiology, is we are headed for a grim final stage. With public health officials seemingly caught in an echo chamber of vaccines mandates, masks and regional restrictions, while infections, hospitalizations and deaths continue to rise, the public will move from public health skepticism to outright loss of faith. We need better answers to this virus. The good news is, these answers are on the horizon.
Oral anti-viral drugs that can be used to keep people out of hospitals are emerging in the U.S., and different vaccines are already being approved in Europe. So, even while COVID may soon seem to be all around us and all but unavoidable, I see new solutions on the way. COVID may once again disrupt our economy this winter, but I believe the disruption will be short lived, as an enduring pandemic spring will eventually come.
As COVID moves from pandemic to endemic, the era of super loose monetary policy will also come to an end in 2022. In an effort to address the inflation created by the policy response to the pandemic, the Federal Reserve intends to scale back its support of the bond market a bit more aggressively than anticipated and is forecasting three short term interest rate hikes next year as well.
While investors may have taken the news of the Fed’s intentions in stride thus far, actually enduring these policy changes will challenge investors repeatedly in the year to come. When financial conditions “tighten,” the initial effects are sometimes hard to perceive for individual investors. While professional money market managers and bond traders may perceive less liquid markets more efficiently, sometimes stock investors only sense deteriorating market liquidity after stock prices move sharply to the downside. Reviewing prior periods of tightening financial markets (2000-2001, 2015) may provide insights. I intend to provide some analysis in the next few weeks.
I realize it may sound like I’m a bit pessimistic here, but in truth I am not. Much of the economic analysis I’ve reviewed has convinced me that the real economy, you know, the one that isn’t traded all day every day, is poised to continue a healthy post pandemic recovery. Estimates of economic growth available in various research reports available range from 3% to 4.5%, which in my opinion is a spectacular level to sustain. While inflation may be raging now, growth in the 3% range should cool it off some, while continuing to grow employment and providing investors with confidence at the same time.
I think we could actually see unemployment in the 3% to 4% range soon, which will be the lowest in my career. And with a tightening labor market, the trend toward higher wages can continue, which should take the edge off some of the inequality tensions present in our country. While we are being hopeful, with higher wages taking the edge off some social tensions and a Congressional election later in the year likely to result in a split federal government, we may see policy making requiring more pragmatic cooperation and less dogmatic ideology. As a result, maybe, just maybe, we can start to heal some of the corrosive political divide in our great nation as well in 2022.
My bottom line is, 2021 was a fairly easy year to be an investor. Stocks worked, bonds worked, and both did so without much stress over the year. 2022 will not be as easy. The times ahead will be more complicated, and require greater diligence. But hard doesn’t necessarily mean bad, and while investing may be a bit tougher going forward, there are still some nice tailwinds pushing us forward.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. Stock investing includes risks, including fluctuating prices and loss of principal. Marc Ruiz is a wealth advisor and partner with Oak Partners and registered representative of LPL Financial. Contact Marc at marc.ruiz@oakpartners.com. Securities offered through LPL Financial, member FINRA/SIPC.
