Each year as December winds down I spend some time collecting my thoughts about how the next 12 months will unfold in the economy, financial markets, etc. I enjoy looking into my super-secret crystal ball (as I do all year long), but then, as I do every year, I realize that it’s pretty futile to forecast 12 months into the future.  Note that we always are ever so cautious about having our opinion play a minimal role in our approach to managing portfolios: we do not manage client portfolios simply according to my opinion in ANY timeframe. And based on past evidence I am not arrogant or dumb enough to dig in my heels and stay with any forecast as the data (inevitably) change. Life continually throws us curves and we just have to adjust as the curve balls come at us.

When putting together predictions keep in mind that I’ve made a career’s worth of mistakes over the past 30-plus years, and likely there will be more to come. Still, it’s fun to ponder the upcoming year so here are some thoughts for 2022.

At home in the USA –

We have had three straight strong years in the US markets, and that has frustrated both the bulls and the bears. It makes it historically unlikely to see another strong ‘up’ year. It appears that Ms. Volatility is here to stay for a while at least, and I would not be surprised to see at least one mild correction over this upcoming year.

2022 is also a mid-term election year which (historically) used to be the worst year of any president’s term, and historically also includes a reasonably predictable 4th quarter bottom. (1990 had a Q4 20% dip, 1998 and 2002 saw 20% declines, 2010 had the flash crash, 2018 saw the Trump crash.)

Too many things need to go ‘just right’ to serve up a fourth straight strong year. Odds are weighted against that. With the Fed no longer at the market’s back (see the Market Minute) the easy sailing may be past. Momentum has been strong, however, and that typically takes a while to subside. There are plenty of chinks in the armor currently and some will most likely slop over into the first quarter.

That said, you’ve heard me say that the sun is always shining SOMEWHERE, and with that in mind there certainly will be areas of strength. The past few years favored lower-quality stocks and bonds and my compass says that this year will likely be a move toward more of a quality market. Along with that, we’re seeing strength wain in the higher-risk Nasdaq Index* as it appears to lean toward the more even-keeled S&P Index*. We have been orienting toward the lower beta, higher quality sectors and individual stocks, but of course the year will not be a straight line. While I’m on that, it also looks like we may see emerging markets and the Euro market once again get a bid. Their pricing is lower multiples than the US market, which tends to favor them.

With those in mind, we’re also leaning away from growth stocks and more toward value plays, as I see the value taking the lead as the new year opens.

From a sector standpoint, a rise in interest rates plus a bit more inflation will likely cause a drag on the really big tech stocks, resulting in some underperformance. And never doubt the consumer. US consumers have more than $2 Trillion still in excess savings — which likely means consumer discretionary will grow along with staples. The residential home market also seems pretty unstoppable at this point.

And we’re also watching the Chinese economy. It appears to be ready to bottom in the next few months and if that turns out to be true, it likely will see increasingly stronger gains as the year rolls on.

So that’s how the 10,000-foot view looks at the start. We’ll see how it actually unfolds and look forward to the insights and challenges.

Ron’s Market Minute – Fed Does It This Time 

Welcome to a new age of monetary policy. Investors are being hit in the face after earlier estimating that any tightening would be small and gradual. But NO. FOMC minutes made public on Wednesday showed that the officials are now fully on board with a faster cut back of the central bank’s asset purchases, which will give it greater ability to raise interest rates. (AND it could happen as soon as the end of Q1!)  Stocks generally do not like tighter money, and on schedule, Wednesday ended with stocks down a lot, and the Nasdaq* (more tech stocks) down over 3%!

Excerpt: ‘a less accommodative future stance of policy would likely be warranted and that the Committee should convey a strong commitment to address elevated inflation pressures’. We’re not in Kansas anymore, or in other words we’ve come a long way from ‘transitory’ inflation. 

The Fed is also going to be more aggressive in reducing its nearly $9T balance sheet, and while it didn’t put a timetable on a runoff (that’s when it shrinks holdings by allowing bonds to mature), many are estimating the tightening could happen as soon as summer. “Participants judged that the appropriate timing of balance sheet runoff would likely be closer to that of policy rate liftoff than in the committee’s previous experience… and could warrant a potentially faster pace of policy rate normalization.” Some officials even said in the minutes that they preferred to “rely more on balance sheet reduction” and “less on increases in the policy rate” to avoid flattening the yield curve.

Kaboom! Committee members commented that inflation numbers had been higher and were more persistent than previously anticipated. While they commented that inflation would decline significantly over the year as supply constraints eased, almost all stated that they had revised their forecasts of inflation for ‘22, and some also raised their guidance for ‘23 as well.

Ms. Market loves cheap money. The Fed’s strong comments make it appear to me that we will be moving away from the cheap money markets of the recent past. Although gains can be made in a more inflationary market, we’ve all gotten used to the negative real rates of return on savings. It should be interesting to see how long it take the consumer to realize that the basic environment is changing. I believe stocks will continue to be the best game in town – for now, but perhaps (as Bob Dylan would say) ‘The times they are a-changing.’

Ronald P. Denk, CFP®
Investment Advisor
Denk Strategic Wealth Partners
10000 N. 31st Avenue, Suite C-262
Phoenix, AZ 85051
Phone (602) 252-8700
Fax (602) 252-8701
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www.denkinvest.com

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