Capital Investment Advisors

7 Economic Themes for 2022

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What a crazy couple of years it has been! It’s almost surreal to think that we continue to be in a world where masks are normal, vaccinations are a part of every conversation, some schools around the country are back to virtual learning and trips abroad are still being canceled.

The news and impact of COVID have left us all with hard-won battle scars both in general life and as investors over the last two years. But rational optimists have been rewarded for staying the course and staying invested with the belief that better days were ahead.

While we can probably agree that we’re glad the last couple of years is over, the biggest question this first month of the new year is what will 2022 bring? We, at Capital Investment Advisors, believe it will be a year in which the U.S. should enjoy more tailwinds than headwinds, making a positive impact on both markets and the economy.

Below, you will find what we believe to be the seven biggest themes to watch for in 2022:

1. Pandemic to Endemic – The pandemic should finally shift to an endemic phase. Less virulent strains in combination with mass vaccination, natural immunity, and multiple treatment options should take extraordinary measures by governments and central banks mostly off the table.

2. Less government stimulus, but stimulus nonetheless – With the pandemic fading, years of massive stimulus (more than $5.8 Trillion in the US alone) will fade. 2022 should see far less even if a modified version of the Build Back Better plan passes in Washington. Stimulus as a percent of GDP in 2020 was 10%, 11% in 2021, but our research partners suggest we should fall to the 2% to 3% range in 2022. Lower economic stimulus than during the pandemic, but still stimulus nonetheless, and on top of a fully reopened, uninhibited US economy.

3. Moderating GDP Growth – Overall economic growth should moderate from the 2% to 6% quarterly growth range we saw in 2021 to a more modest but still strong 2%-3.5% range. Looking at data tracking the critically important US Leading Economic Index (LEI), we can glean that a recession over the next year is highly unlikely. LEI levels are hovering around +10%, and when the data is this elevated, falling to the zero bound or below (spelling a recession) is typically years away.

4. Strong Corporate Earnings – While earnings growth won’t keep pace with 2021’s recovery, estimates from our research partners suggest that we should still see earnings growth in the 9% range for the S&P 500. To put this in perspective, the S&P 500 companies during 2019 earned in aggregate $163/share. 2022 should bring earnings to $223/share according to FactSet.

5. Tamer Inflation – Inflation which has also weighed on consumer sentiment in 2021 almost has to moderate. Think of it this way, if inflation doesn’t moderate then, for example, economy cars could reach the $50,000 range. An unsustainable level. So, the inflation we’ve seen should become self-correcting and begin to moderate in 2022. That being said, we think it will remain more elevated than it has been over the past decade. What does this mean for the average investor – own companies with pricing power.

6. A Hiking Fed – The Fed has kept interest rates exceedingly low over the past two years in response to the extraordinary economic circumstances caused by the pandemic. As the pandemic moves into an endemic phase and the US economy continues to gain momentum, it will be natural for the Fed to raise rates to combat inflation and return to a more “normal” interest rate environment. Even though this would raise borrowing costs in the US, higher rates should actually benefit massive parts of the US economy. Think banks, financial institutions, and higher rates of interest for millions of American savers.

7. Politics Back in Focus – It’s time for yet another onslaught of election commercials that will bombard the airways across the US as the midterms arrive in November. Historically, election years do cause a heightened level of market uncertainty, which might keep gains in the first half of the year in check. However, historically, midterm election years still tend to be strong for markets: 9.9% on average. But, once the elections are settled, the next twelve months are typically even better, averaging 15%. And there have not been any negative returns for the S&P 500 in any twelve-month period going back to 1946 following a midterm election.

All of this being said, we acknowledge that there’s no way to perfectly and consistently predict what will happen to the US economy or stock market. Perhaps more importantly, we also must remember that markets cannot be timed with perfection. This acknowledgement reinforces what we do know; that we should own quality companies for long periods of time and be willing to ride out the inevitable and sometimes painful declines that come our way. Participation is the key to investing, not perfection. 

Bottom Line

The good news in 2022 should far exceed the bad. The election cycle suggests a muted stock market for the first few quarters. However, lower inflation, strong earnings growth, and a pandemic moving to the rear-view mirror should bode well in the year ahead. Couple this with normalization for interest rates and dividend-seeking investors should be rewarded.

This information is provided to you as a resource for informational purposes only and is not to be viewed as investment advice or recommendations. Investing involves risk, including the possible loss of principal. There is no guarantee offered that investment return, yield, or performance will be achieved. There will be periods of performance fluctuations, including periods of negative returns and periods where dividends will not be paid. Past performance is not indicative of future results when considering any investment vehicle. This information is being presented without consideration of the investment objectives, risk tolerance, or financial circumstances of any specific investor and might not be suitable for all investors. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax, or investment advisor before making any investment/tax/estate/financial planning considerations or decisions. Investment decisions should not be made solely based on information contained in this article. The information contained in the article is strictly an opinion and it is not known whether the strategies will be successful. There are many aspects and criteria that must be examined and considered before investing.

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