As we start the year, we are staying focused on market signals and weeding out market noise. When reviewing primary market signals, we expect the equity markets to move higher from here based on the following factors: positive economic growth & earnings, lower impact of COVID 19 & variants, and gridlock in Washington DC. Because inflation, interest rates, Fed behavior and legislative uncertainty will drive increased volatility this year, we encourage a review of portfolio allocation (including 401k) and time horizon of investments.
The link below provides detail in charts, however, below are 4 primary economic and market signals that provide perspective on where we go from here:
1. GDP Growth
While decelerating from the pace of 2021, US economic growth is expected to remain reasonably strong in 2022 especially as COVID 19 moves increasingly into the rearview mirror. Consensus estimates for GDP growth this year are 4%. We see this as the potential start to another “economic reopening” cycle in the first half of 2022.
2. Earnings
The US Q4 2021 season is rolling out; the outlook is for lower, still positive revenue and earnings growth. There is a valuations “tug-of-war” between positive earnings and rising interest rates over the course of the year. Quality (companies with strong balance sheets, earnings and cash flow) will become increasingly important as we move through a volatile 2022.
3. Interest Rates and Spreads
While rates have risen across the yield curve, the real action has been in the short end of the curve as the market reacts to a higher inflation and a more hawkish Fed. Our focus on fixed income is a quality security selection. Corporate balance sheets are solid, which means coupons should remain stable. While we see areas of opportunity in high yield, short duration and alternative credit, now is not the time to be taking excessive risk in a fixed income portfolio.
4. Inflation & Central Bank Policy
Inflation is a big economic issue of the year. We will be watching Fed behavior and actions this week specifically and as we move through 2022. We believe 3 rate hikes have been priced into the market; the Fed has signaled it may begin raising rates as early as March, further driving market volatility as a result. The Fed Funds Futures market is pricing in a 1.00% Fed Funds Rate by the end of 2022. The counterbalance here is the direction and level of interest rates and the actions of the Fed as we move through the year.
The portfolios have been rebalanced & are properly aligned as we move through the first months of the year. As we rotate through the market cycle, we will make recommendations on changes as new leadership emerges.