What does that hold for the markets and the economy as we move into 2022? To help figure out what to expect next, it’s helpful to first look at where we are.
2021: Year of Review
how it started. Looking back, 2021 proved to be a great year for both the economy and the market. We started 2021 with the pandemic in full swing, as the second wave peaked as the year began. The economy had recovered substantially from the first wave, but it seemed to slow down as the second wave progressed. However, the market had fully recovered and remained largely stable, indicating that everything will be fine as far as they are concerned.
How did it end? As the year ended, the markets proved to be largely correct. The economy continued to recover, with job growth and consumer spending strengthening. Companies were very confident, investing when they could hire and investing when they couldn’t. And earnings rose not only in relative terms, but in absolute terms, leading the markets into a spectacular year as valuations were largely held up — despite fears that rising rates would drag them down.
Will 2022 be a repeat performance?
Similarities. Looking ahead, 2022 looks like it could be a repeat of 2021 – to a lesser extent. As we enter the year, the pandemic is in full swing again, this time with an Omicron wave. The economy has continued its recovery, but we see some weakness again at the start of the year due to the recent wave of the pandemic. However, the market is reassuring and nearing an all-time high, suggesting that all will be well as far as they are concerned. In other words, it’s almost exactly the same paragraph as I just wrote for early 2021—and there’s a reasonable chance the results will be the same. But there will certainly be differences.
Difference. On the medical front, Omicron is much more contagious than previous forms, and the case count is much higher than it was a year ago. It is also looking at the role of vaccination – the rate of which has largely stalled, leaving large parts of the population unvaccinated. On the economic side, the federal stimulus program, which greatly stymied last year’s growth, will not help in 2022. And it seems that not many people are going back into the labor force, and many people are working again. Looking back, 2021 benefited from a number of factors, not the least of which was starting from a very low base, which we don’t have as we start 2022. Looking ahead, 2022 has its advantages.
Short-term medical risk. On the medical side, the number of cases is much higher, but the variant itself appears to be less harmful. New vaccinations have decreased, but the current vaccination population remains high. And for those who do catch the virus, effective treatments are starting to become available, which will further limit the damage. On top of this, there are signs that the Omicron wave may eventually intensify but be smaller than previous waves. There are real risks here, but mostly in the short term, which can further limit losses.
Sustainable economic development. The same applies to the economy as well. Yes, federal stimulus programs are not holding back. But that purchasing power has been replaced by something more sustainable, wage income, as both the number of jobs and wages have grown exponentially. The rate of growth may be slowing, but the base is much higher than it was a year ago, providing a strong foundation for continued growth.
Politics and Policy. Even in terms of politics and policy, 2022 has its advantages. Yes, there will be medium term, which will be disruptive. But the debt limit dispute has been deferred. Yes, the Fed will raise rates. But it’s doing so because it sees continued growth ahead, and the markets have largely indicated agreement with the proposed course. Looking back, 2021 has had its share of political and policy disruptions, and even in 2022, they will be no worse (and possibly better) than they were last year.
Market. This is what the market is saying once again. Income growth is likely to continue as the economy grows. As rates rise, valuations will decrease somewhat, but this is a normal part of the economic and market cycle and will likely be more than offset by those higher earnings. And all other risks (medical, political, international) are risks we’ve seen and dealt with before.
get closer to normal
Looking back, early 2021 was a scary time. But despite the roadblocks, things were going well. Looking ahead, the start of 2022 is also a scary time, but it is likely that we will see similar positive results for the full year.
That said, 2022 probably won’t be as strong as 2021 from a market perspective. Last year, we started on a very low basis, both medically and financially, leaving a lot of room for improvement. Now that we are more healed, there is less room for growth. But as we get closer and closer to normal, we should expect growth and markets to return to normal as well. 2021 was a rollercoaster year, with a great payoff for that volatility. 2022 could well be an easier ride, resulting in a more modest—but nonetheless positive—result.