Now that January is underway, what will 2022 have in store for us? Will it be a good year or a bad year for stocks?
The mood in the equity markets has changed. Last year’s stunning gains led to a heated, exuberant atmosphere. However, persistently high inflation has forced the Fed into action. They’ve suggested there could be three to four interest rate hikes this year, leading Wall Street analysts to pull back their forecasts.
Investors are jittery. Will equities continue to over-perform? Or is 2022 the year things finally grind to a halt? That said, this is the same market that has weathered several doom-laden predictions, a pandemic and new variants, and constant accusations of being overpriced.
The Fed, Inflation, and Stimulus Packages
Equities, in particular Tech stocks, took a tumble in early January following news that the Fed would act aggressively to curb inflation by increasing interest rates.
Tech stocks are sensitive to high-interest rates, which has opened the door for other sectors to shine, like Energy and Banks. Of course, these aren’t the only areas that investors can rotate into if the Fed can’t tame inflation. REITs, Utilities, Consumer Staples, and Healthcare equities can all thrive in these conditions.
Of course, not everyone is convinced the Fed will follow through with three to four interest rate hikes. For some, it’s far from a foregone conclusion, and there is precedent in the ’90s that suggests the Fed could pull a few surprises.
Are Quants Back?
January also highlighted one area that could be promising in 2022. The Absolute Return fund, run by AQR Capital Management, had its best five-day period since it began 23 years ago. Is this a sign that the “quant winter” has passed?
Interestingly, the average quant equity fund outperformed the market and stockpickers last year. Their respective returns were:
● Average quant equity fund: 27.8%
● US stock market: 26.5%
● Average stock picker: 24%
Will Semiconductors Go Big?
Semiconductors had a good 2021. But 2022 could be even better. Electric vehicles, 5G rollout, and the growth of cloud computing all stand to increase the demand for semiconductors. KLA, Kulicke & Soffa, and Marvell Technology look like exciting bets.
How the Rising Dollar Will Affect Equities?
The dollar rose by 7% last year. While this extra purchasing power might seem attractive at first glance, it could significantly negatively affect the stock market. Strong GDP and job growth and comparatively high US treasury yields have attracted plenty of foreign money.
More foreign investment will flood into the US if the Fed goes through with interest rate hikes. As the dollar rises in value relative to foreign currencies, many US companies could take a hit because 40% of their trade comes from overseas markets.
In short, a strong dollar could lead to lower foreign sales and revenues, which may drag down US equities.
The CNBC Millionaire Survey suggested that more senior market participants don’t expect big things from 2022. Only a little more than half of the millionaires surveyed think the S&P 500 will gain over 5% this year.
These figures suggest a shift from the optimism and risk-taking that have characterised the last few years. However, there is one group of investors with high hopes: Millennials.
52% of Millennial millionaire investors expect the S&P 500 to grow by 10% next year. At the same time, 39% of the same group are predicting a 15% rise.
This exuberance and positivity are visible in Millennials’ attitudes to other assets. Half of all Millennials surveyed suggest that they will increase their cryptocurrency investments over the next year. So, where will the crypto market go?
It’s been a tough few months for crypto. Since Bitcoin’s November 2021 peak, it’s down almost 40%. Other altcoins have taken a similar fall. A big driver of these losses is China’s decision to ban crypto. However, the CPC seems interested in blockchain and has signalled a move toward adopting state-run NFTs.
The markets are looking unpredictable at the moment. Interest rate hikes, supply chain issues, new COVID variants, and an unsettled job market are all threats to a runaway bull market.
However, this market has defied expectations for a long time. The signs point to a Tech stock slowdown, but that will create opportunities for other sectors, like Energy and Banking. It’s unlikely that we’ll see returns of 20%+ this year, but it’s not time to worry about a crash just yet.
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Alpesh Patel OBE