Happy New Year! We hope you all had a wonderful holiday season and we wish you and your loved ones a happy, healthy, and prosperous 2022. As we kick off a new year, the world is – as expected and maybe even more so this year – offering up more than a few things for investors to be concerned about.
Consider the dramatic spike in the Covid case count, driven by the highly transmissible Omicron variant; the elevated level and persistency of inflation; the still “missing” millions of Americans from the labor force; uncertainty around fiscal policy as the Democrats look to revive the Build Back Better Act; the mid-term elections (November will be here before we know it!); an expected step down in earnings and economic growth (relative to 2021); a backing up in bond yields and perhaps, most importantly – outside of the pandemic – the hawkish tilt by the Federal Reserve, as our central bank winds down its securities purchase program and looks to begin raising interest rates and shrinking its balance sheet. It’s enough to make one’s head spin and make one more than a bit pessimistic on the markets.
Our head might be spinning, but we remain optimistic on stocks in the new year, thinking that still strong economic and corporate profit growth, ample and attractively priced capital for companies and consumers, and still-low rates – among other factors – will help push the market up and to the right. And for those times in 2022 when our head is really spinning – and we expect that will happen more than once – we will keep in mind what we think is the most important dynamic for the economy and markets this year – that we are very early in the Fed rate hiking cycle, and that if history is any guide, it takes multiple interest rate hikes before monetary policy puts the US economy at risk of recession (see graph) and US stocks at risk of a bear market.