Updated 7 Views for 2022
2022 has proven to be full of unexpected events impacting the economy and financial markets. Of most concern is the prolonged war in Russia and Ukraine, which has had profound effects on energy and commodity prices. The human toll of the war has also weighed heavily on global leaders. 40-year record highs in inflation and the U.S. dollar remaining at multi decade highs have also surprised investors. We remain comfortable with our current positioning and have made portfolio adjustments in the first quarter designed to capitalize on the volatility.
- Global growth slows from last year. Unlike last year, international growth is faster than the U.S. The U.S. dips into a recession in the second half of 2022 or early part of 2023.
- International equity markets, both developed and emerging, outperform U.S. equity market indices.
- Wide swings among individual stocks and sectors continue. Peak earnings growth is behind the U.S. equity markets, but earnings still grow in the low double digits for the S&P 500. We prefer value-oriented sectors over growth, especially financial and cyclical stocks. Volatility, as measured by the number of 1% moves, will double from last year.
- U.S. small and mid-cap companies will benefit from the accelerated adoption of technologies brought forward by the pandemic. They also are more agile in adjusting to higher inflation and the lingering supply bottlenecks. We believe many investors overlook international small cap stocks and believe they should broaden exposure to this asset group.
- Real assets, such as commodities and real estate, have positive returns as inflation remains elevated. We continue to prefer broad based exposure to commodities and real assets.
- The Fed will begin raising rates as scheduled in the first half of the year. Inflation remains elevated above the Fed’s target of 2%. Interest rates rise, and the 10-year treasury ends the year above 2% for the first time since 2018. The 10-year treasury also is range bound, moving between 2.5% and 3.25% throughout the year. Our view is that the high on the 10-year treasury was likely hit at 3.48 on June 13.
- Investors will start to move away from the record cash they now hold and look for new avenues to invest. This will help support financial assets and enable alternative assets to become more mainstream.
Sean A. Lynch, CFA