Written by Keith Wirtz, Chief Investment Officer, Union Savings Bank
It’s the start of a new year and as the COVID-19 pandemic continues, many Connecticut businesses owners and investors are looking ahead, especially since last year threw us a few curveballs. While 2021 was overall a year of economic recovery and growth, inflation was much worse than expected and a labor shortage surfaced. On top of it all, the contagious Omicron variant popped up at the end of the year, indicating that the Pandemic is not yet over.
It’s hard to tell what 2022 will have in store for us, but based on recent numbers and trends, I present my “Top 10 List” with the hope that it will help you prepare for the issues ahead.
1. The Global Crisis shifts from a Pandemic to an Endemic
Health industry experts are now thinking that the Omicron variant may help push this crisis into an endemic phase, one where we adjust to living with seasonal flair-ups of COVID variants. After two years of challenge, this would be a hugely positive development for Americans and for the world.
2. The Economy Will Open Up More
As the pandemic turns into an endemic, our lives are going to change as Americans learn to live with the pandemic and return to a sense of true normality. Thanks to vast improvements on the healthcare front, I have an optimistic view that this will allow things to open completely and for the economy to thrive after a year of recovery.
3. Inflation Problems Will Continue
When it comes to inflation, I think that pricing pressure will persist longer than desired, and that likelihood shouldn’t surprise anyone after the year we’ve had in 2021. This period of elevated inflation is going to continue through the first half of 2022. But by the end of the year, I’m expecting the consumer price index (CPI) to be pacing at around 3%, so I think we’re going to see moderation on the inflation front, but it’s going to take longer than previously expected.
4. U.S. GDP Growth Will Near 3%
Overall, I expect that the U.S. economy will register decent growth in 2022, and we see a 3.25% increase in the country’s gross domestic product (real GDP). We take this positive view for several reasons and the first on our list is the labor market. The unemployment rate for the U.S. is on a decline and, importantly, we have millions of open positions now being advertised. The need for workers is exceptionally strong and is contributing to our supply-chain kinks. However, we’re expecting that today’s tight labor market conditions will slowly improve, lifting the productive capacity in the economy.
5. U.S. Companies Will Post Solid Earnings in 2022
Last year was marked by the tremendous rise in both sales and earnings for U.S. companies. We see more good news this year and are expecting solid results to repeat. As a metric, we track the fundamentals for the blue-chip S&P 500 index. The composite earnings number for these 500 companies should rise from $206 per share to $225 per share for the year (+9% EPS growth).
6. Stock Market Returns are Likely to Moderate
In 2022, stock market returns should follow company fundamentals higher. However, investors should lower their expectations; we are projecting stock market returns to range from +7% to 10%. More importantly, market volatility will be higher too.
7. Bond Returns Will Be Flat to Negative
For the credit markets, I’m expecting returns to be “flat to negative” again. This is based on the idea that with rising rates we’re going to see bond prices dropping. Overall, it will be a difficult year for bond investors.
8. Midterm Elections Will Result in a Divided Government
Looking ahead to the Midterm elections, in my view, the most likely outcome will favor Republicans. I am expecting the Republicans to pick up enough seats in the House and the Senate to take overall control of Congress. If correct, this will leave the country with a divided government. And divided government means gridlock. For business owners and investors, a divided government also means two years of lower legislative risk.
9. National Debt Will be an Area to Watch
When it comes to the national debt, the Congressional budget includes an expense line for interest costs (the annual cost to carry the nation’s debt). Recently, interest rates have hovered at all-time lows, and this helped to contain the country’s annual debt payments. Unfortunately, things are about to change. With the national debt jumping at the same time interest rates are rising, we need to prepare for federal interest expenses to climb too. Will this number crowd out other priorities down the road?
10. Portfolios Are Biased to Developed Market Equities
As we put together portfolio strategies for our clients, we are emphasizing three themes for 2022: favoring equities over the other classes; moving bond strategies to a “neutral/short” duration stance; and remaining biased to developed market equities, starting with U.S. equities.
Local business owners and investors alike will want to make note of these predictions for the upcoming year. After a year of recovery with some surprises, I’m optimistic that we’ll see some semblance of “returning to normal” in 2022 and that means good things for our economy.
Keith and our team of USB financial advisors bring worldly expertise and local knowledge, and service to the table for every discussion. Call us today and set yourself, your business, and your employees up for success in 2022 and beyond – 866.872.1866 or visit unionsavings.com.
Disclaimer: This is a general communication being provided for informational purposes only. It is not designed to be a recommendation for any specific investment product, strategy, plan feature, or other purposes. By receiving this communication, you agree with the intended purpose described above. Union Savings Bank and its’ representatives are not suggesting that the recipient or any other person take a specific course of action or any action at all. Prior to making any investment or financial decisions, an investor should seek individualized advice from personal financial, legal, tax, and other professionals that take into account all of the particular facts and circumstances of an investor’s own situation.
Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice. We believe the information provided here is reliable but should not be assumed to be accurate or complete. The views and strategies described may not be appropriate for all investors.