What surprises will 2022 hold for investors? Dive into the data with our experts and find out.
As we head into the new year, investors are being inundated with forecasts for the year ahead. While interesting and, at times, entertaining, the value of any forecast is always questionable. As the old saying goes, “There are two types of market forecasters—those who don’t know, and those who don’t know they don’t know.”
At Parametric, we don’t advocate a forward view. However, we regularly engage our clients in conversations about the market environment, including understanding the themes that may drive sentiment or risks that have a low probability but high impact if they were to occur. In that vein, we look forward to 2022, not with a forecast but with eyes wide open to potential risks and opportunities. Let’s start by highlighting some themes from 2021 that will likely carry over into the new year.
A Look back at 2021
Coming into the year, COVID-19 garnered the primary focus of the markets. The newly elected Biden administration quickly proposed and passed a $1.9 trillion American Rescue Plan. It’s worth noting that this plan followed on the heels of $2.9 trillion in COVID-19 relief bills signed into law in 2020. That is $4.8 trillion of fiscal stimulus in a $21 trillion economy, for those doing the math. Later in the year, the administration piled on top of that a bipartisan infrastructure bill that included $550 billion of new spending spread out over five years. All of this spending was paid for with borrowed funds.
Domestic equity markets reacted favorably to a combination of stimulus money and vaccine rollouts that facilitated the first steps back to economic normalcy. International developed and emerging equity markets were more subdued, as they generally trailed the US in both categories. As summer transitioned into fall, supply-chain concerns, related labor-market shortages, and heightened demand driven by cash in consumers’ hands led to a 6.8% surge in year-over-year inflation. It was the fastest growth in inflation since June 1982. In November, the Fed announced it would begin an eight-month taper of its quantitative easing program. However, after being confronted with sharply rising inflation, Fed chair Jerome Powell indicated the tapering could be accelerated and completed in four months, giving the Fed the option to raise rates earlier in 2022 if necessary.
At the beginning of 2021, US-China relations were a concern for the market. Most investors believed that the incoming administration would soften the rhetoric on China and eventually lower existing trade tariffs. Rhetoric has declined, but tariffs remain in place. The announcement of the Chinese Communist Party’s common prosperity initiative coincided with the government’s crackdown on tech giants in an effort to curb their dominance. Private tutoring companies also caught the attention of regulators. Our equity strategists highlighted these events in a timely blog post in September. Unsurprisingly, Chinese equity investors reacted negatively to the crackdown.
Adding to the uncertainty in the Chinese market, Evergrande, the second-largest property developer in China by sales, continued to teeter on the edge of default as it struggled to make timely interest payments on its debt. Experts have warned that a formal default by Evergrande could be China’s Lehman moment, as the firm has borrowed money from 171 domestic banks, 121 other financial lenders, and countless individuals who put down deposits on future construction. More broadly, the situation with Evergrande and other Chinese property developers indicates that China may be at the beginning of an extended slowdown in real estate. That outcome would negatively impact China’s overall growth, as real estate accounts for one-fourth of China’s GDP (that number is closer to 15% for the US).
Equity market returns
Source: Refinitiv, 12/13/21. For illustrative purposes only. Not a recommendation to buy or sell any security. It is not possible to invest directly in an index. Past performance is not indicative of future results.