Key Trends and Concerns for Investors in 2022
The year 2020 was a dramatic rollercoaster ride for investors. The COVID-19 pandemic was nothing like anyone had seen before, and the immediate impact of the virus on the world was economically devastating. However, 2021 was much different. Even with the virus still lurking and making a strong head back into the mid-year with its second wave, countries were better prepared economically to handle the crisis.
The plummeted stock markets gained momentum, and investors were delighted. Between February 2020 and December 10, 2021, the S&P index appreciated nearly 40%, more than double the 11% annual average return from the index since the beginning of 1980. Overall, the economy was at ease. The imbalances brought by the pandemic began to phase out, paving for more than expected growth and steep rising inflation. However, several aspects of the economy still suffered the effects of the COVID-19 pandemic. Tighter labor markets, dropping bond yields, large household savings, unexpected market liquidity due to public relief programs, new market highs, low-interest rates, and more have continued to affect the investors even through the end of 2021. Moreover, the stock market recovery in 2021 was not evenly distributed. Even though the S&P index gained a massive 40% between February 2020 and December 10, 2021, the Dow Jones Industrial Average only appreciated by 20% and the S&P value index by merely 15% in the 22 months. Hence, despite some equity markets witnessing a stellar growth in 2021, investors are cautious rather than excited as they step forward to welcome 2022. The impending risks of the ongoing Coronavirus pandemic and the changing Federal Reserve policy are shaking the enthusiasm and confidence of investors for the new year.
Investors want to know more about the investment trends of 2022, the best growth stocks for 2022, the best sectors to invest in 2022, and more.
As per predictions, the market will move ahead from its current peak, but an uneven and multi-layered recovery will continue in 2022, delivering record-breaking growth.
Industry experts warrant high caution as you step forward as an investor. Even though experts expect acute inflation worries to subside by mid-2022, other economic aspects will be troublesome.
As an investor, it is advisable for you to be prepared to tackle certain issues and challenges that would require you to evaluate your asset allocations and investment strategies. You may consult with a professional financial advisor to make recommendations for your investment portfolio or design a customized financial plan to manage your finances.
Here are some of the key trends and concerns for all investors and their financial advisors to watch out for in 2022:
1. Rising Inflation:
In 2022, inflation is expected to be a key concern for investors and advisors. High inflation has a direct impact on investors. As inflation rises, investors pay lower prices for corporate earnings. According to Bloomberg and the U.S. Bureau of Labor Statistics (after careful analysis of data since the 1950s), compressed price-earnings do not result in lower equity prices if the sustained inflation rate is less than 4%. But the inflation rate is much above the stated safe limit. As per the Consumer Price Index for All Urban Consumers (CPI-U), inflation was a staggering 6.8% through November 2021. This peak is the highest year-on-year increase since 1991. The accumulated consumer demand, high energy prices, labor market changes, supply chain shortages, increase in commodity prices, etc., are some of the reasons behind the accelerated inflation rates. In 2022, inflation is expected to be high, but it will likely not be as high as in the 1970s. Rather some experts expect inflationary pressure to be lower than 2021. On the contrary, other experts say inflation will overshoot the target, causing concerns for investors and advisors as they look to juggle their portfolios to obtain inflation-adjusted high returns. If inflation continues to rise at the same rate, it will touch the 85 mark in February 2022. Either way, inflation is not expected to mellow down until the fourth quarter of 2022. The Global Economic Outlook states that the yearly U.S. inflation will likely fall to 2.3 percent in the fourth quarter of 2022. As an investor, it may be prudent to be cautious of the steeply rising inflation and consult your advisor to rebalance your portfolio to generate inflation-adjusted high returns.
2. Withdrawal of the COVID-19 federal policy:
The Federal Reserve asset purchase program, put in place to ease the economic impact of COVID-19, will likely end in the first half of 2022. Further, the announcement of several new measures by the Federal government to tackle inflation will temper economic output and affect investors. The Fed introduced an ultra-easy bond-buying policy at the beginning of the COVID-19 pandemic in 2020. However, with the rising inflation rates, the Fed has officially given several indications directing the rollback of its bond-buying policy. Primarily, the central bank of America will increase the reduction of its monthly bond-buying. In January, the Fed will buy only $60 billion of bonds, which is half of its prior November taper and nearly $30 billion less than its December bond purchase. Typically, in November 2021, the Fed was thinning bond purchases by $15 billion per month. The central bank doubled the number by December 2021 and aims to increase the reduction more in 2022. Once the bond-buying process is complete, the Fed will raise the interest rates in 2022 and up until 2024. Two interest rate hikes will likely hit the market in 2022 and two more in 2024. Both the policy moves are in light to combat the high inflation rates, which are the highest in 39 years for consumer prices. The closing of the bond-buying program sooner than expected indicates the reduction in the economic stimulus the Fed is adding. The objective of the central bank is to strengthen the economy.
3. Low bond returns:
As 2021 draws to a close, bond returns can drop to their lowest for investors in 2022. The total return on the two-year U.S. Treasury Note might drop to zero for the first time. Further, the five-year U.S. treasury returns are also the lowest since 1994, even in a year when the U.S central bank raised the interest rates nearly seven times. The yield on the ten-year Treasury note was around 1.43%, only slightly higher than the two-and-a-half-month low of 1.36% in December. In all, low bond yields and the contraction of the Fed policies indicate low bond returns and high volatility for the upcoming year. For you (as an investor), low bond yield translates to limited coupon income and reduced opportunities for price appreciation. However, there is some hope as the Fed closes its bond purchase program, paving a clear path for interest rate hikes in 2022 and beyond. Strict monetary policies might not favor riskier assets, pushing the bond yields further up. Given the current situation and expected 2022 outcome, it may be advised to hold high-yielding bonds (riskier but well-diversified portfolios) to get an additional influx of money. Riskier but high-yielding bonds include insurance-linked securities, corporate loans, and mortgage bonds (non-government). Corporate loans are better than corporate bonds because of borrower quality, considerable valuations, and low sensitivity to Treasury yields. Further, high yields and limited risk exposure to interest rates make a strong case for investment in non-government-sponsored mortgage bonds. One of the best investments 2022 for non-taxable but low-yields are municipal bonds. If you are a highly taxed investor for 2022, investment trends in 2022 support allocating money in high yield municipal bonds with an aim to generate income rather than expect price gains. For advisors, this is their field of expertise. The advisor can effectively guide you on how to create a profitable investment portfolio despite the absence of competitive bond returns. Advisors can direct you to adopt a more tactical investment approach driven by a hedged strategy or alternative methods. Advisors can suggest the best ETFs to invest in 2022. ETFs or Exchange Traded Funds are a sound, less-risky alternative to equity investments with the near-to-same earning potential.
4. Political instability:
As the country steps into 2022, political issues can be a cause of concern. The ongoing battle over federal spending, the growing concerns over the debt ceiling, worsening climate change impact, and the big debate over the student debt will come to the forefront in 2022. Further, with expectations that the Consumer Financial Protection Bureau (CFPB) reshaping the fiscal policy and President Biden reappointing Jerome Powell on the Federal Reserve Board (FRB), political instability can affect investor portfolios and returns. Labor market issues can also foray into political agendas. Additionally, the global minimum corporate tax rate can impact multinational corporations, affecting investor portfolio returns. Also, another concern for investors is the Congress’ trust level with voters. Decisions regarding infrastructure, taxes, and more can have impending repercussions for investors and aggravate market volatility. You can consult your financial advisor and seek recommendations on how to benefit from the investment trends in 2022.
5. Shift in the equity market:
The U.S. equity market has a positive outlook for 2022. With inflation expected to reduce by the mid of 2022 and the relatively low-interest rates, equity investments will still be attractive. However, the returns in equity investments in 2022 might not be as high as in 2021 because of the evolving pandemic situation, potential fiscal policy alterations, and monetary policy retort. Experts expect the S&P 500 earnings to rise to $225 per share, nearly 10% higher than anticipated levels of 2021. All 11 S&P 500 sectors are performing well. Nine of these sectors recorded a 16% growth, making it easier for investors to find the best growth stocks for 2022. You could consider investing in stocks like technology, cyber security, mobility, security and analytics, digitization, etc. Experts also suggest investment in sectors like Energy, Industrials, and Materials that have been laying low for the past few years. With ramping of production activities causing high demand for raw materials, the stock prices in these sectors are anticipated to experience a push. Moreover, restaurant and travel company stock prices can also experience a rise as the world returns to normalcy in 2022. These can be some of the best sectors to invest in 2022. However, you can consult your financial advisor to identify the best investments in 2022 for your unique financial needs and create a diversified portfolio inclusive of those investments. However, if you do not want to directly invest in the equity market, you can choose to tap the stock market through mutual fund investments. Ask your financial advisor to suggest to you the top-performing funds to invest in 2022. Alternatively, you can also invest in foreign stocks. For 2022, experts foresee a price appreciation in foreign equities. The low stock prices relative to earnings, sound monetary policies, and past performance favors the international equity market.
6. Potential in real asset investments:
Positive economic outlook and inflation are expected to benefit from real assets, like property investments and commodities, in 2022. In a low-interest-rate environment, real asset investments can shine because of their ability to provide stable cash flows. Further, increasing income and diminishing vacancy rates are likely to keep property valuations high in 2022. However, the increasing interest rates in 2022 can accelerate general income, subduing real asset returns. In terms of commodities, 2022 has high potential. As the world recovers from the COVID-19 pandemic, the global demand for commodities will likely rise. Further, planned infrastructural investments can push the demand for industrial metals. As an investor, discuss the prospects of investing in real assets with your professional financial advisor. You could alternatively find the best ETFs to invest in 2022 that have holdings in real assets.
7. Tax alterations:
After rebalancing portfolios to accommodate for inflation-adjusted returns, taxes can be a concerning topic for investors in 2022. The proposed ‘Build Back Better’ bill has not proposed any new tax increases for 2022, except for 5% and 10% surtax on individuals with a gross income of more than $10 million and $25 million, respectively. Even though there are not many tax alterations in 2022, it is still important for you as an investor to consult your financial advisor regarding the tax strategies for 2022. Financial experts suggest taking tax advantages seriously and aiming to max out contributions in employer-sponsored retirement accounts like a 401(k) and even other tax-beneficial accounts like an IRA (Individual Retirement Account), Roth IRA, and Health Savings Account (HSA). It can also help to reduce your turnover in brokerage accounts to cut down on your taxes because all gains from a taxable brokerage account attract a sizable tax charge. To reduce the future tax burden, consider holding high-income investments, like REITs (Real Estate Investment Trusts) that generate tax liability in the current year, in tax-advantaged retirement accounts. For instance, the dividend paid from REITs and interest earnings from high-yield bonds held in taxable accounts is charged at the time of interest or dividend payment. You can consult your financial advisor to further lower your tax bill by deploying tax-loss and tax-gain harvesting strategies. It is also critical to plan your tax structure for the future. The Tax Cuts and Jobs Act (TJCA) will expire by the end of 2025. This means that unless there is new tax law in enforcement at the time in the future, the tax bracket will shift to the pre-TJCA era. Your estate tax exemptions will also reduce. Hence, if you have an estate worth $5 million or more, you have to prepare in advance for the impending tax changes. Your financial advisor can use efficient estate tax reduction strategies like annual exclusion gifting, spousal lifetime access trusts (SLATs), and charitable lead trusts (CLTs).
As the economy transitions from uncertainty towards a more certain future, investors will likely benefit from sound investing strategies deployed well-in-time. Being aware of the changing investment trends in 2022 equips you to make wise financial decisions. You can also consider engaging with a professional financial advisor to navigate the challenging times and reach a point of stability. Professional financial advisors understand the investment trends and have the expertise and experience to guide you through it all. Diligent investments with active financial management are a great combination to tackle the challenges of the coming year.
If you are looking to prepare your financial plan to suit the upcoming investment trends in 2022, use WiserAdvisor’s free advisor match service to find highly qualified and vetted fiduciary advisors. Answer a few questions about yourself and get matched with 1-3 fiduciary advisors that are suited to meet your financial requirements.