The second year of the pandemic was more taxing than the first year. The lockdowns in 2020 forced many of us to take it easy and spend time with our families. In a way, this was a relief. However, as the COVID restrictions dragged on into the second year, the novelty of the lockdown also died down. By the end of 2021, many people had just started to get on with their lives when the “O” version struck. Fortunately, “O” isn’t as deadly, but it’s significantly more contagious. The silver lining is that this variant is so contagious that after a few months, everyone in the U.S. will either have gotten the vaccine or caught COVID, and we will achieve herd immunity of sorts. So, while we probably are going to pay a significant price in terms of lives lost and treasure spent, I feel that 2022 will be the beginning of the end of COVID.
The stock market is a collective of investors voting on the state of the future economy. Being the capitalist that I am, I believe the markets are a better guide to when the world will get back to a new normal rather than our politicians. People tend to invest when they are confident in their finances and the general economy.
With that said, I believe the 2022 stock market is going to be very volatile as companies work through the mess COVID has caused, including: inflation, supply chain, labor shortage, meme stocks, mental health issues and the list goes on and on. Additionally, 2022 is a mid-term election cycle in the U.S. Historically, mid-term election years don’t perform as well as non-election cycle years (see chart below from Capital Group). Overall, I feel the markets are going to continue to head higher in 2022 as the world economies open. Let’s go 2022!
Inflation Outlook
Inflation will linger longer than the Federal Reserve Bank anticipated. Consumers may see price relief in the second half of the year as the supply chain is sorted out. Large companies like Amazon and Walmart have taken drastic steps to get around the supply chain issues. They are starting to lease their own shipping fleets. The video below exemplifies how desperation is the best motivation.
Interest Rates
The Federal Reserve Bank has announced a few major adjustments to their policy. They increased its inflation forecast for this year, 2022 and 2023. It now sees inflation running to 5.3% this year, above its previous estimate of 4.2%. They estimate the unemployment rate dropping to 4.3% this year, lower that its previous estimate of 4.8%. The governing body also said it will accelerate the reduction of its monthly bond purchases. The Fed will be buying $60 billion of bonds each month starting January, half the level prior to the November taper and $30 billion less than it had been buying in December.
ETF Spotlight
Black Rock’s iShares Real Estate Sector (XLRE) was the best performing ETF last week. XLRE provides exposure to real estate by owning real estate management & development companies and real estate investment trusts (REITs). However, it does not own any mortgage REITs. The top five holdings are American Tower (cell phone towers), Prologis (Industrial), Crown Castle (cell phone towers), Equinix (digital infrastructure), and Public Storage (storage).
