Our clients and readers are accustomed to receiving our annual Market Outlook after the first month of the new year. We use this method because market action in the month of January tends to provide us with a good set of events and data that helps us understand the tone of the entire year.
Events in the first two months of this year, although slightly delayed, have finally allowed us to solidify our economic and market expectations for 2022.
- We believe the Federal Reserve will raise interest rates four times this year. In our view, the Fed Funds Rate should increase to a level of 1% versus market expectations of 6 to 8 hikes making rates 1.5% to 2%.
- Economic growth will falter as the year progresses and we expect a high probability of a recession in the fourth quarter of 2022 or early 2023.
- Inflation remains stubbornly high for longer period before dropping significantly in 2023. We fear that the talk of stagflation may begin to creep into the financial markets.
- We expect the S&P 500 to trade between a range on the downside by 25% to the upside of high single digits. We have already seen declines in the double digits in the early part of this year.
- It will be a market of stocks and not a stock market. Stock selection and asset allocation will drive performance.
- We expect high quality growth names to outperform, especially in the information technology sector, despite the early year declines. Growth will by year-end sell at a premium in a slowing economy.
- Unfortunately, the high level of volatility will persist for most of the year before abating in the latter part of the year.
THINGS TO WATCH
- The Federal Reserve and how it adjusts monetary policy. This will be the most important factor impacting financial markets.
- Domestic politics, especially as we near the U.S. Mid-term Elections.
- Finally, geopolitics. Recent events on the global stage continue to impact markets. These events are always difficult to predict, and as such, one reacts and places odds of certain events unfolding and their possible impact on markets.
We continue to rely on our data driven approach to navigate these headwinds in financial markets as we stress the importance of maintaining quality positions in our model portfolios.
If you have any questions, please contact us directly at 949.472.4579. Feel free to forward this article to anyone who might be interested in our insight.