A trader wears “2022” glasses as he works on the floor of the New York Stock Exchange (NYSE) on Friday, December 31, 2021 in New York, US.
Michael Nagle | Bloomberg | Getty Images
Inflation, tightening of central bank policy and the Covid-19 transition rate remain bullish threats to stocks, but analysts largely do not expect a serious recovery in 2022.
US equities had a poor start last week, driven by further selling by the Federal Reserve and fresh and highly valued US tech stocks. That trend continued on Monday, as global stocks once again slipped into the red, although the Nasdaq rebounded of late to break its four-day losing streak.
A major source of the terrifying surprise introduced by the latest meeting minutes of the Federal Open Market Committee was the desire of policymakers to strengthen their balance sheets, the importance of which analysts at Deutsche Bank have argued was previously underappreciated by the market. Was.
The rapid spread of the Omicron COVID-19 variant around the world has also continued to cloud the equity outlook in recent months, with daily caseloads reaching record numbers and strict social restrictions in place in several major economies.
Luca Paolini, chief strategist at Pictet Asset Management, said on Monday: “The Omicron COVID version may lead to more restrictions, but the economic recovery remains resilient nonetheless, meaning stocks are not particularly vulnerable to a correction. “
Paolini suggested that the global economic recovery is supported by a strong labor market, repressed service demand and healthy corporate balance sheets. As a result, Pictet is looking for opportunities to increase its weighting in stocks in 2022.
However, he acknowledged that despite expectations of strong GDP growth, rising inflation poses some downside risks, particularly in the US and Europe – and with prompting the Fed to raise interest rates by June It is likely to peak in the first half of 2022.
Although Pikett maintains a positive outlook for equities, Paolini’s team has taken a neutral stance on the asset class as a whole in light of negative liquidity conditions for the US and keeping the stock highly valuable.
James Soloway, chief market strategist at SEI’s investment management arm, made a similar tone last week, noting that GDP growth would decline, labor markets would tighten, inflation would peak and the short-term negative impact of COVID would continue. , the global economy must continue to manage through periodic setbacks.
“While there are pockets of speculative behavior in some areas of the financial world – mem stocks, SPACs, cryptocurrencies and NFTs, for example – we do not see the kind of speculative enthusiasm that would point to a serious equity correction in 2022.” Soloway said.
Although data so far has indicated that the highly transmissible Omicron variant may not be as severe as previous iterations of the virus, Mazars chief economist Jorge Lagarias said on Thursday that markets should be complacent about the possibility of other pandemic-related shocks. should avoid.
“We cannot allow ourselves to fall into the trap of trying to predict the timeline for an endgame when the next turn is unknown. Currently, the risk is non-linear, but parabolic,” Lagarias said.
“It’s all about a new vaccine-resistant dominant variant to undo months of global vaccination and throw predictions out the window.”
US valuation vulnerability
Lagarias also pointed out that US stocks, in particular, are expensive and focused — a characteristic that was highlighted during last week’s weakness among the tech giants — but noted that investors currently have few options for the stock.
He suggested that a sharp correction in risk asset prices is possible due to central banks’ paradigm shift on quantitative easing, while inflation is a constant dilemma here.
“All this uncertainty is bad for the business, but how riskier assets are going to do is still unknown, as drivers have been completely isolated from all of the above for too long,” Lagarias said.
“It could be that ‘residual liquidity’ and ‘stocks have no options’ arguments prevail, or it could be that markets go into ‘fear mode’ and secular volatility increases.”
Invesco’s global market strategist Christina Hooper included a potential US stock market correction in her top 10 forecasts for 2022.
“The US stock market is likely to improve in the first half of 2022, but I expect a relatively rapid correction,” Hooper said.
“It’s been so long that we’ve had a major correction that the likelihood of one has increased — and raising the odds is the fact that the Federal Reserve is beginning to normalize monetary policy in the first half of 2022 and raise rates. may begin to increase.”