2021-11-12 10:27:47
With 2021 coming to an end in less than two months and the markets reaching record highs post-pandemic, the question on investors’ lips right now is what can we expect from the stock markets in 2022?
As we emerge from the pandemic, and with governments around the world putting in recovery measures to help economies, what awaits us as we enter 2022? Rising inflation and central banks sticking by their policies of not raising interest rates has been a recurring theme, but will it stay that way into 2022?
Capital.com spoke to analysts, asking them for their thoughts on what trends to expect in 2022.
Will the bull run continue?
Recent record highs in the markets have been incredible, especially for US indices, which are seeing some record-breaking numbers.
We’ve witnessed better than expected earnings and lower capital costs, which have contributed to the stock market gains we see today. But can the post-pandemic rally continue into 2022?
“We’ve come through some challenging months with regards to the realisation that inflation will stay stubbornly high for longer than we thought and central banks becoming hawkish,” said Piers Curran, managing director at Amplify Trading.
“We’ve come through the peak of the Delta variant. Indices in the US are punching new highs.”
Kathleen Brooks, founder of Minerva Analysis, believes that the record highs will continue, as long as central banks don’t slam on the breaks.
“What we have been seeing is over 60 days of record highs in 2021, so not an uncommon feature but of course all things must come down,” Brooks told capital.com.
“We have loose monetary policy at present but unless central banks slam on the brakes we won’t see a massive pullback in stocks. In the spring that’s when we may see some weakness, momentum – the way that it is we will see some pull back.”
However, not everyone agrees. Chris Harvey, head of equity strategy at Wells Fargo Securities, predicts that Wall Street will see a vibrant year end, but in 2022 things will start to slow.
“You’re going to bring equities to a level that they can’t sustain. We’ll have the equity market melt-up. We’ll bring stocks to a level where the fundamentals and valuations don’t support them,” Harvey said in a recent interview with CNBC.
Stock market predictions 2022: S&P 500
According to Factset, industry analysts have made some stock market projections, forecasting that the S&P 500 will see a price increase of 14.8% over the next 12 months.
When you drill down by sector, the stock market outlook appears quite favourable for the communications industry, which is forecasted to enjoy a 18% increase – the sector has seen the largest upside difference between the bottom-up target price and the closing price on 6 October.
Experts’ stock market analysis forecasts that the financial industry will see the smallest increase of 7.8% – the sector had the smallest upside difference between the bottom-up target price and its October 6 closing price.
Note that analyst predictions can be wrong. Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before investing. And never invest or trade money you cannot afford to lose.
Growth stocks versus value stocks in 2022
Amplify’s Curran sees growth stocks taking the lead in 2022. “We will get another leg in growth stocks now. We went through a phase where growth stocks underperformed value coming through quarter three because people realised inflation wouldn’t drop. Central banks are more hawkish which hurts growth stocks,” he said.
“As long as the global economy regains momentum as the delta variant subsides then what you are left with is a lot of stimulus in the system, on fiscal and monetary side. You also have a lot of household cash which should lead to a nice phase of growth outperforming value in the first half of 2022.”
Inflationary pressures
Economic upswings and imbalances in demand and supply can feed into upward price pressures. The pandemic-induced downturn and subsequent rebound have taken place on a huge scale, resulting in inflationary pressures.
The most recent figures from the US Bureau of Labor Statistics (BLS) showed that the county’s inflation was up 6.2% in October from a year ago. That’s the largest 12-month increase since November 1990.
In the UK, data from the Office of National Statistics revealed that despite inflation falling slightly in September to 3.1% compared to 3.2% in August, price growth is still at elevated levels.
Aviva Investors, a global asset management business, believes recent rising inflation is transitory and will fall back in 2022 as economies reopen more fully.
“Central banks in most developed markets share this view and are using it to justify maintaining their relaxed stance on monetary policy,” Stewart Robertson, Senior Economist (UK and Europe) at Aviva Investor, wrote in a note.
“Recent changes to their inflation mandates and operating frameworks have made this easier and imply that they will allow (even encourage) inflation.”
Despite inflation spikes being seen as transitory, such trends cannot be ignored. Aviva believes that risks to its central scenario are tilted to somewhat higher and more persistent inflation outturns over the next 12 months.
Can we expect interest rate hikes in 2022?
As inflation is running hot, interest rate hikes may arrive sooner than expected. The markets expect the US Federal Reserve (Fed) to raise interest rates.
“We continue to expect the Fed will wait until December 2022 to proceed with rate liftoff, but we can’t ignore the risk of a policy mistake with the Fed tightening too early in the face of supply-driven inflation,” Gregory Daco, Chief US Economist at Oxford Economics, said in a note.
ING also believes the Fed will introduce a rate hike next year. “Our suspicion is that inflation stays higher for longer with the Federal Reserve responding with interest rate hikes in September and December next year,” an ING statement said.
“Well, there is more reason for them to raise rates in 2022, no point hiking when still buying assets,” said Minevra’s Brooks.
“The big problem is whether the markets have been strong enough to cope with a tightening of central banks’ balance sheets and selling assets, and the answer is no they are not, even though there is a strong demand for everything.”
The Bank of England (BoE), like the Fed, has not raised interest rates. However, many analysts and experts believe this will not be the case for very long.
According to Capital Economics, the BoE’s Monetary Policy Committee will possibly raise rates in December or February to 0.50%.
The BoE is waiting for additional information around the UK labour market. Capital Economics expects a rate rise to 0.25% in December or February and a further increase to 0.50% shortly after.
“The Bank of England (BoE) won’t raise rates until more confident that the labour market will recover,” Amplify’s Curran said.
Winding down the Covid-19 stimulus package
The Fed announced last week that it will start tapering its bond-buying programme in November. The US central bank wants to reduce the amount of money in the system, one possible reason for a high inflation rate.
As the US central bank starts to wind down its stimulus package, the effects of its policy on the markets are likely to extend into 2022.
Data from CFRA, an independent investment research company, has shown that stocks could benefit from the tapering of the bond market.
Looking at the 60-year history of market sentiment, CFRA said that there are more gains to come, across all sectors in the S&P 500.
Tapering can be beneficial to the economy when inflation is high. Inflation can rise when the economy has been over-stimulated – winding down the bond purchase tapering could dampen fears over inflation.