As we entered 2022, we noted concerns that had developed during 2021 — the supply-chain crisis, inflation, and a Fed rapidly pivoting to restrictive monetary policy — were fully visible to investors and likely to pressure stocks. Despite the rough start to the year, we remained (and remain) positive on the outlook for equity markets. In our opinion, markets have over-reacted to both the FED rate-hike expectations and the Russian invasion of Ukraine. Over time, we would expect the market focus to shift from geopolitics back to economic fundamentals. We continue to see a U.S. economy that remains resilient in the face of these challenges, with economic growth still above trend, and corporate earnings up 8%-10% in 2022.
Interest rates are rising, which is both healthy and rational. The Fed is entering a rate hiking cycle to help combat inflation and to stabilize interest rates in a post pandemic environment. Given that the Fed is beginning its hiking cycle from basically zero, rates are anticipated to remain low even when the Fed is done hiking. For the time being, inflation is likely to be equities’ friend, not their foe. Companies with pricing power, commodities’ companies, and materials’ firms, in particular, should do well. Russia has invaded Ukraine, but this is unlikely to change the long-term outlook for corporate profits. As a result, any drop in equities would end up being a buying opportunity.
The bottom line is that the winds of change are blowing hard in 2022: the impact from COVID is winding down, borders are in flux, and monetary policy is in for a major and long overdue shift. In spite of these changes, we think equities are likely to rebound from recent strife and work their way higher this year. The bull market in stocks won’t last forever. But, for now, it isn’t at an end.
Our focus has always been long-term, and we will continue to hold steady and enjoy the rebound to come.
If you, your friends or family have any questions about the current market movements, please give us a call. A quick phone call can provide a lot of clarity and hopefully put minds at ease. As always, we are here for you and happy to help.
Written by: Tiffany Coffin
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