The last two years have been eventful in terms of market performance. The year 2020 proved to be volatile and uncertain as Covid-19 upended the economy, ultimately resulting in a return to relative stability and normalcy at its conclusion. The year 2021 defied even the most optimistic outlooks in terms of growth, even though that growth has resulted in levels of inflation not seen in nearly four decades.
According to Mariner Wealth Advisors, 2021 was a strong year for the S&P 500. Last year marked the third consecutive year that large-cap U.S stocks provided double-digit returns, which generated 26% compounded annualized return over that three-year period. They foresee 2022 being the fourth consecutive year for that same double-digit growth, something that has only happened twice in the last century – in the 1940s during World War 2 mobilization and during the tech run of the late 1990s.
Given how strong 2021 was, as well as the years preceding it, analysts are making their predictions for 2022. Now, there is one question on everyone’s mind: how should we expect markets to perform in 2022? In this blog, we break down the outlook for 2022 as it pertains to the stock market, asset-class returns, and the general outlook for economic growth and performance.
Most analysts believe that 2022 will be another year of growth in economic activity, albeit slower and less precipitous than the growth seen last year. According to Vanguard’s 2022 Outlook Report, they project growth in the United States and Europe by 4.0%, depending on the outcome of supply chain issues, inflation, and macroeconomic policy. More accelerated rates of growth are to be expected in China (5.0%) and in emerging markets (5.5%).
Across asset classes, Vanguard projects that U.S. equities will grow between 2.3% and 4.3% with 16.7% median volatility. U.S. aggregate bonds are expected to grow between 1.4% and 2.4% with 4.6% median volatility. Meanwhile, global equities excluding the United States are projected to grow at a more accelerated rate of between 5.2% and 7.2% with 18.4% volatility. Global bonds excluding the United States are expected to grow between 1.3% and 2.3% with 3.8% median volatility.
Growth in equities is expected to be lower, with overall return in equities projected to be lower in 2022 and throughout the next decade. Vanguard, PGIM, Fixed Income, and T Rowe Price all project a moderate outlook for 2022. Specifically, PGIM predicts that as pandemic-related economic stimulus is scaled back and interest rates are increased as the economy recovers, most countries will see above-trend growth, albeit moderate growth. Vanguard also projects that there is a high probability that international equities will outperform U.S. equities in the coming years. The report for Mariner is more optimistic, but their analysts’ optimism is measured given the unknowns around Covid, inflation, and the upcoming midterm elections.
The outlook for fixed bonds is not as rosy. Economic recovery, supply chain problems, and labor scarcity, paired with high consumer demand is resulting in inflation and rising interest rates, which pose the risk of portfolio losses to bond investors. Not all outlooks for the bond market are bad though. Multi-sector bonds have the potential to help investors generate returns even in an uncertain market. Additionally, Vanguard speculates that U.S. investment-grade bonds should outperform U.S. Treasury bonds by 50 basis points annually.
All that being said, analysts across the board are warning about the uncertainty looming around the pandemic. Growth and economic recovery have generally resumed following the crest of previous variant waves. However, with the Omicron variant causing a comparatively larger surge than Delta globally, there is the possibility of lockdowns, restrictions, and fear among consumers that could upend the economy once more. Nobody is expecting the dramatic volatility seen in early spring 2020, however, the potential for volatility and a slowdown in growth is certainly plausible. However, if the Omicron variant subsides faster than expected, the markets will continue on their moderate projected growth trajectory in 2022
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