In our most recent podcast, we were able to sit down with economist Andrew Opdyke to discuss what to expect in the economy in 2022. If you want to listen to the podcast, we encourage you to sign up here.
When you’re working to secure your retirement, the economy will have a major role in how your portfolio will perform.
The forecasts for 2022 are never set in stone, but they can help you get an understanding of what type of fluctuations your portfolio may see this year. However, before we dive into some of the questions we discussed with Andrew, let’s look at what transpired in 2021.
2021: Year in Review
For many people, 2021 was an interesting year because of everything that happened in 2020. At the end of 2020, vaccines came around, and many people viewed 2021 as a recovery year. But unfortunately, we’re still talking about COVID-19 to start this year.
Massive vaccinations have taken place, with signs that the latest wave of COVID-19 from the Omicron variant may lead to less hospitalization.
However, in 2021, we saw some differences in the market, such as:
- Strong profit growth from S&P 500, small- and mid-cap
- Emotions led to some volatility
- Double-digit growth for many stocks
Overall, 2021 was a good year for retirement planning and the market because major companies still posted high profits.
Entering the 2022 Year
Heading into 2022, we’re expecting less of a change in volatility and business going forward. We expect that in 2022, the pace of growth will moderate as businesses want to see if they can get jobs back and continue growing.
With that said, the supply chain is a major concern.
The world hasn’t seen a supply chain issue like we have had since the pandemic. At the beginning of the current wave of the virus, we’re also seeing supply chain issues that are leading to:
- Rising inflation
- Slower product delivery
Large numbers of truckers and other people involved in the supply chain are off work because they’re sick or recently tested positive for COVID. As a result, the supply chain has slowed to start off the year.
However, we see the supply chain recovering.
Shutdowns and shelter-in-place orders are unlikely in 2022, and we expect that this will allow people to continue going to work. We expect 300,000 to 350,000 jobs added per month. If we’re correct, the job figures in 2022 will pass the pre-COVID figures by the end of the year.
Ultimately, we’re still down 3 million jobs to start the year, but it’s widely expected that this figure will continue to drop as we move into the mid-year.
Demand remains very high now. The stimulus helped with this to some extent, so there may be some slowing here. Stimulus checks aren’t coming again, as far as we know, but demand remains incredibly high, which is good for business.
Inflation may continue to rise to start the year. Supply chains are still running, albeit slightly slower due to the recent variant.
The good news?
In mid-2022, it’s fully expected that inflation will begin to taper off and fall back to traditional ranges of 3% to 4%.
Politics and How It Plays In the 2022 Economy
Politics will always play a role in the national economy, and there are a few things we’re seeing right now that may impact the economy this year:
- Massive infrastructure bill discrepancies
- Child tax credit may not be in play
Also, 2022 is a mid-term election year. In November, there will be some disruption in the political sphere which may help or hurt agendas going forward. The infrastructure bill is still in the works, and there’s hope that it will pass in some form.
Adding in infrastructure right now will take a few years to really pick up the pace, even if the bill was to pass today.
Due to a lack of capacity, there’s no feasible way to see crews on the road next week building bridges if the bill passed today. These types of bills and their impact take a while to be put in place logically once they pass into law.
Build Back Better Bill
The Build Back Better bill, which has been tampered down, has a lot of corporate tax hikes associated with it. The closer we get to reelection, the less likely we will see this bill pass. Politicians don’t like to raise taxes during an election year, so it’s a bill that is likely not going to pass in 2022.
Maybe the package passes at $1.5 trillion or less, but if it does, there’s also a good chance of a party change on the House level as a result.
Markets That May Recover Due to a Current Lack of Manpower
In 2020 and 2021, earnings growth numbers were substantial in 2021.
The drop in earnings in 2020 put the benchmark low and kicked off tremendous growth in 2021. However, 2022 is likely to see growth fall out of the double digits for these companies and back into the 8% to 9% range.
Market growth rates are expected to fall back to typical levels.
Also, price-to-earnings for many companies is expected to really play a factor in stocks readjusting. Many companies saw these values increase on expectations that never materialized.
Of course, there’s also a price concern as inflation rises and perhaps demand falls, leading to better prices for consumers but lower earnings for corporations.
Earnings quality will matter a lot in the coming year.
Small- and medium-sized businesses may also start to come back if we can tame COVID and avoid another shutdown. While mega-caps did well in the past year, these smaller companies are set to come back a little stronger in 2022.
With that said, keep a few points in mind:
- Markets are unlikely to grow at the same rate as they have over the last 2-3 years
- Companies with solid profit margins will continue to do well
- Small- and medium-sized companies may experience the most gains
Expectations of super growth need to be tamed because the high growth is unlikely to continue in 2022 because it really can’t.
Concerns and Expectations for the 2022 Year
Government and Federal concerns exist because the response on these levels will have a major impact on the markets. The response to inflation will be a major focal point because the government downplayed inflation, stating that it was just short-term.
However, we’re now seeing that inflation isn’t short-term and is still sticking around.
The Fed did start to change its tune at the end of 2021. If the Fed addresses inflation, it will help keep the economy high. Unfortunately, if the Fed doesn’t raise the interest rate and tackle inflation, it will lead to market volatility.
We certainly need to keep a close eye on what the Fed does to fight inflation.
If nothing is done to tame inflation, we expect it will significantly impact the markets going into the end of the year.
Surprises and Bright Points in 2021
One of the best points of 2021 was that we learned:
- People adapt
- Companies adapt
From an economic growth standpoint, we’re at a new growth high that hasn’t been seen since the 80s. We’re also producing more with 3.5 million fewer workers, so all of these are very bright spots for 2021.
The embracing of technologies and productivity tools will continue to help the market in the coming years.
Earnings growth was real in the past year, but now it’s time to move into 2022 and hopefully return to the fundamentals.
Hopefully, in 2022 we go back to the fundamentals where there are no questions of stimulus, supply chain issues and shutdowns. The last time we’ve seen the money in the system that led to growth was after WWII.
In fact, the funds pushed into the market led to the industrial revolution.
Now, with the influx of cash in the market and government dollars, we may be on the cusp of a new revolution in 2023 and beyond. It’s an exciting time to look at the year ahead and see what companies can make happen with all the money available and in high demand.
The markets may not grow like they did in 2021, but the possibilities in 2022 and 2023 are impressive and should provide long-term, sustainable growth.
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