Market outlook for 2022
With 2021 is ending a relatively volatile fashion compared to the calm that prevailed throughout most of the year, is this a recognition of the issues that lie ahead in 2022?
Inflation
The ‘great reopening’ of the global economy of 2021 prompted a bout of inflation of a magnitude not seen for decades. A spiral of price increases unnerved policymakers, governments, consumers and investors, with scenes of container ships queuing outside ports in the US suggesting that the problem will not go away in the short term.
Businesses across the globe have raised concerns about price increases and the effect on margins these will have. Investors have become concerned that this will hit earnings, and will put pressure on stock prices after the strong gains of the year. In addition, markets are worried that the rapid pace of price increases will prompt central banks to tighten policy more quickly than previously anticipated, rolling back QE programmes (as has already happened in the US) and increasing interest rates.
Omicron
The appearance of a new variant in southern Africa has revived fears of widespread restrictions across the globe, hitting the recovery. For the moment it looks like the variant is highly transmissible, but not as severe, particularly for those who have had at least two vaccinations. Nonetheless, the news reminds us that the Covid-19 pandemic is not over yet, and that there are still virus-based risks to the outlook for the coming year.
Geopolitical concerns
As 2021 winds down, the tension in Ukraine is ramped up. Russia has maintained a large troop presence on its border with Ukraine, and regular military exercises have been carried out as a show of force. US intelligence sources have warned of the risk of a new Russian invasion of Ukraine, which has been receiving assistance from Western sources.
In addition, the China/Taiwan standoff remains unresolved. China has long promised that the island will eventually reunite with Beijing, a position naturally opposed by Taipei, but the expansion of the Chinese military in size and capability makes a forced reunification a more viable prospect. These two flashpoints could merely rumble along without developing into anything more serious, but are still concerns for the year ahead.
US dollar
Having been widely-predicted to fall in 2021, the US dollar had a very good 12 months. The dollar index has rallied by over 7% this year, boosted by the better performance of the US economy, and also by expectations of a change in Federal Reserve monetary policy. As well as driving declines in GBPUSD and EURUSD, this has also made life more difficult for emerging markets, another favoured trade at the start of the year. Uncertainty over the outlook for the new year thanks to the virus could well mean that the Fed does not tighten as quickly as some anticipate, even with the strong CPI readings of late, which could mean that a lot of the good news is already ‘in the price’ for the dollar.
The above topics are all perhaps filed under ‘reasons to worry’ for the year ahead. After another good year for stock markets in 2021 it is perhaps natural to worry that the stock market rally will encounter a tough patch. History shows us that the returns in one year are no real predictor of what will happen in the next year – some good years are followed by bad ones, but others are succeeded by years with decent returns. Investors should be aware of the risks, and expect volatility, but with earnings still improving the overall health of the stock market is still good.