2022 Market and Economic Outlook: Finding the Upside

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As we closed out 2021, the world looked both different from a year ago and very much the same. Another wave of the virus was underway, with a new variant that may be even worse than the one before. This new medical threat, along with rising inflation and continued supply chain problems, challenged the economic recovery, leaving investors wondering if markets could keep reaching new highs. Indeed, these risks are still very real. But so are the opportunities—and 2022 is likely to see even further improvement from 2021.

The Road Back to Normal

2021 brought us a long way back to normal. Despite the Delta wave in the second half of the year, the country remained open, and the economy returned to something like the pre-pandemic normal. Job growth was substantial, consumer spending bounced back, and businesses remained confident. Markets rose to new highs throughout the year on a combination of an economic rebound and continued monetary policy support. In many respects, it was a banner year. As we enter 2022, the question is, can this momentum continue?

The answer is yes. The improvement will likely slow as we approach the new normal. But the existing economic and market momentum should be enough to keep the country growing and markets rising throughout the year.

Inflation and supply chains will begin to move closer to the pre-pandemic normal in 2022. This shift will be positive for the economy. But as the economy improves, the yield on 10-year U.S. Treasuries will likely rise to pre-pandemic levels of 2 percent to 2.5 percent. This rise could be a headwind, as markets will respond to higher rates with lower valuations. Driven by the growing economy, however, lower valuations will be offset by healthy earnings growth. This should result in the S&P 500 rising modestly to around 5,000, and international markets should show similar gains. 2022 will not be a banner year like 2021. Still, as we approach the new normal, modest growth is what we should expect.

That’s not to say it will be easy, of course. There are a number of risks that need to be taken into account.

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