Market and Economic Outlook
The last month of 2021 was filled with lots of new information — the new omicron variant of the coronavirus first hit U.S. shores, along with cautions that its level of vaccine resistance is best mitigated by a booster shot.1 That’s good news for the fully vaccinated. The unvaccinated, unfortunately, are months away from that level of protection.
As to be expected, the investment markets took a hit when omicron was first identified.2 While they tend to recover over time as we normalize, defend and find new ways to cope with the virus, it’s important to remember that markets are most volatile during periods of uncertainty. And not knowing when this pandemic will end is almost certainly going to rattle the investment markets throughout 2022.
However, December also demonstrated significant employment levels, including news of the highest level of labor participation (61.8%) since the lockdown of March 2020.3
Moving forward, Morgan Stanley is not particularly sanguine about the investment markets, indicated Mike Wilson, chief U.S. equity strategist and chief investment officer. Between the ongoing cyclical downturn and the Federal Reserve’s recognition that rising inflation may not be transitory, the money manager recommends that investors take a defensive stance toward equities and consider sectors like health care and consumer staples.4
The new year is a good time to take stock of your asset allocation. Rebalance allocations that have strayed from your target percentages and make sure that your strategy remains on track to meet your goals. If you’d like help conducting a New Year’s portfolio review, please contact us today.
Merrill’s Global Wealth & Investment Management Investment Strategy Committee maintains a level perspective when it comes to opportunities in 2022. The wealth manager believes that while valuations are likely to remain flat or drop somewhat, it sees profit growth and outperformance in stocks, particularly in the financials, industrials, energy and materials sectors, and has a long-term positive outlook for technology. Among fixed income securities, Merrill prefers investment-grade and municipal bonds over treasuries, and recommends relatively short durations.5
In December, the Federal Reserve announced it would aggressively cut back on bond purchases in the new year and anticipated the need for several interest-rate increases during 2022. However, it’s worth noting that while rate increases are designed to dry up capital and put the brakes on inflation, it’s not necessarily a bad scenario for investors. In fact, over the past three decades, whenever the Fed embarked on a progressive rate hike, the S&P 500 increased, on average, 7.7% higher over the ensuing 12 months.6
Note, however, that past performance is not an indicator of future results and that the current economy is at least partially driven by forces not seen since the 1918 Spanish flu. We highly recommend you consult with your financial professional before making any portfolio moves relating to the current market environment.
Content prepared by Kara Stefan Communications.
1 Katie Kerwin McCrimmon. UCHealth. Dec. 16, 2021. “Booster shots are the best protection against omicron.” https://www.uchealth.org/today/booster-shots-protection-against-omicron/. Accessed Jan. 26, 2022.
2 Kyle Woodley. Kiplinger. Nov. 26, 2021. “New “Omicron” COVID Variant Rattles Stock Markets.” https://www.kiplinger.com/investing/stocks/603841/new-omicron-covid-variant-rattles-stock-markets. Accessed Jan. 26, 2022.
3 Tim Smart. U.S. News & World Report. Dec. 7, 2021. “Decoding December’s Job Gains: We May Be Nearing Full Employment.” https://www.usnews.com/news/economy/articles/2021-12-07/decoding-decembers-job-gains-we-may-be-nearing-full-employment. Accessed Jan. 26, 2022.
4 Mike Wilson. Morgan Stanley. Dec. 17, 2021. “Fire & Ice Continues Into Year-end.” https://www.morganstanley.com/ideas/thoughts-on-the-market-wilson. Accessed Jan. 26, 2022.
5 Merrill. December. 2021. “The Pivot Is On.” https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMOL/Viewpoint_December_2021_Merrill.pdf. Accessed Jan. 26, 2022.
6 Harry Robertson. Markets Insider. Dec. 21, 2021. “The Fed is set to hike interest rates in 2022. Here’s what that means for US stocks.” https://markets.businessinsider.com/news/stocks/stock-market-outlook-federal-reserve-interest-rates-us-equities-sp500-tech-2021-12. Accessed Jan. 26, 2022.
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