The time has come for our yearly market outlook article.
Most of what we planned for 2021 has happened, how will we do in 2022?
I discuss inflation, the fed, value vs. growth and more.
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undefined undefined/iStock via Getty Images Written by Sam Kovacs Introduction
The year is coming to an end, and while many are rushing to buy their last minute Christmas gifts (I’ll go tomorrow), investors like you and I are looking at what is yet to come.
There is a lot of questions that need to be answered, with inflation raging, the fed tapering, and the Omicron variant dragging out the pandemic into its third year, all while the S&P 500 (NYSEARCA: SPY ) is close to all-time highs, and has a Shiller P/E ratio which is the second highest in its history.
How do dividend investors deal with all these inputs and still come out on top?
To help you navigate the current environment, we decided to take part in Seeking Alpha’s “2022 Market Outlook” series and answer a list of questions which they provided. Questions & Answers
Q: What do you expect to be the key driver of stock market performance in 2022? What items will impact market performance – for better or worse?
I think it is quite clear that there are 3 items which are in the forefront of financial news, and those will be the ones to look at: the pandemic, inflation, and the Fed’s taper and potential rate hike.
Of course they are all connected.
Inflation has happened because of both demand shocks and supply shocks caused by the pandemic and government’s response to it.
Now, Jerome Powell has finally realized what we have been saying for over a year: inflation is not transitory. So the Fed has to act to keep inflation in check. A taper is the first step. But a taper is just the gradual reduction of market stimulating effects. The first implementation of a restrictive monetary policy would be an interest rate hike.
In markets, it is not so much the facts, but participants’ reactions in anticipation of the facts which drive movements.
Today, everyone expects a Fed taper in Q1, then a rate hike at some point in time.
The logical response, would be to favor value names and sectors, which have less to lose from higher rates.
At the same time, the pandemic causes uncertainty, despite the economic impact of each wave decreasing since the onset of the pandemic.Once the clouds clear around the new variant’s implication, and we get out of winter, market participants will start pricing assets with more certainty. Q: What role will the Fed play in the coming year? Ever since the Fed adopted modern monetary theory, or MMT, I’ve been warning that like all economic models, there would be real world constraints which would make the application of the model difficult.I explained this in detail in a previous article , but to keep it short: The economy is under its potential so you inject money into it. This shouldn’t cause inflation, but should stimulate the economy. The economy recovers to full potential, and the money is still in the economy, which creates excess demand, and inflation. We’re here right now, with money still being injected through asset purchases. The complication comes from the fact that inflation has been both caused by demand and supply side shocks. Powell wished it was just supply side and would subside. He then realized he was wrong, although he could have read our stuff 10 months ago and came to the conclusion much earlier. Regardless, the theory then says that you need to take the excess cash out of the economy by a) raising taxes (and then shredding the cash), or b) reducing government expenses. And this is exactly where the model finds its real world limits.I explained this exactly a year ago in our Guide for 2021 : Modern money theory will find its limits on the day when you need to increase taxes to take cash out of the economy in an already inflationary environment. It will be a political nightmare. So the Fed’s role in 2022 is to decide how they will address deviating from Modern Monetary Theory. The answer will be a restrictive monetary policy, in the form of a rate hike. Whether this is enough or not to tame inflation […]