2022 Investment Outlook

Growth Vs. Growth & Income P/E Spread

Welcome to 2022! What a year 2021 was – coming out of 2020 and the COVID lockdowns we anticipated a strong market and that is certainly what we got. When it’s released in January, we will see that 2021 has provided the highest GDP growth since the 1980’s. However, it should be noted that we’ve also seen the highest inflation in years, large amounts of federal spending and the M2 supply of money has grown at record rates.

According to Brian Wesbury, Chief Economist at First Trust, “While profits and stock prices are at, or near all-time highs, real GDP will still end 2021 lower than it would have if COVID had never happened. Meanwhile, inflation under COVID has been much higher than the pre-COVID trend.”

However, it’s not all doom and gloom. Most large asset managers, including First Trust are optimistic on the markets in 2022. Sèbastien Page, CFA, Head of Global Multi Asset at T. Rowe Price states, “over the next year, I think the bottom line is that we will face slowing growth, but still very high growth.” Consumers are in a strong cash position, especially in the United States, where they account for approximately 70% of the American GDP. Additionally, household wealth in aggregate has grown by 22% and contrary to popular opinion, according to JP Morgan, it’s not just higher income households that are benefiting. Pent up demand for housing should continue to fuel new home construction, which according to Realtor.com, we are short 5.24 million homes in the United States, so there’s a lot of building left to do. Corporate balance sheets are in pretty good shape, with high liquidity and low debt ratios. Finally, Transportation bottlenecks appear to have eased in late 2021, as seen by a sharp drop in global seaborne shipping costs.

Chief Investment Officer, John-Mark Young, at Whitaker-Myers Wealth Managers reminds investors, “one should always invest for their time horizon, because while asset growth projections have a lot of data, information and intelligence put into them, there are always unknowns. Additionally, we remain committed to our baseline asset allocation recommendations in regards to Growth, Growth & Income, Aggressive Growth & International.” According to Vanguard’s 2022 Investment Outlook, the asset class that looks most stretched (overvalued) from an equity perspective is US Large Cap Growth and it wouldn’t be unrealistic to assume that many clients are significantly overweight to Growth considering its historic ten-year run. However, Large Cap Value (Growth & Income) and Small Caps (Aggressive Growth) and Developed International Markets (International) are classified as fairly valued, according to Vanguard. To be clear there is one additional classification Vanguard uses which is undervalued and no stock asset class fell into the undervalued measurement.

Another item to note, in regards to your equity allocations are the effects of interest rates. Interest rate increases tend to have an indiscriminate negative effect on Growth Stocks, while having a generally positive effect on Growth & Income sectors. In summary, investors should avoid recency bias. As a result of the acceleration of online sales and technological innovations, the pandemic has left us with the widest gap of Growth vs. Growth & Income in history. The picture shown on this post, helps us understand that point. We haven’t seen a gap this wide since 2000, which of course was the dot.com bubble. After 2000 we saw Growth & Income returns hit -5.62% (2001), -15.52% (2002), 30.03% (2003), 16.49% (2004), 7.05% (2005) and 22.25% (2006). Growth Stocks similarly retuned -20.42% (2001), -27.88% (2002), 29.75% (2003), 6.30% (2004), 5.26% (2005) and 9.07% (2006), faring well below their Growth & Income brethren.

Below we have briefly summarized and provided links to the 2022 Investment Outlooks we found most beneficial. We look forward to serving you and your families well in 2022, through our holistic financial, tax and investment planning.

JP Morgan 2022 Central Projections & Risk

Stock Market Growth: Earnings growth offsets moderate P/E compression to lift equity markets. Value (growth & income) outperforms on high bond yields and P/E compression of growth stocks

Fixed Income (Bonds): 10-year treasury yields rise to between 2.00%-2.50%. Carry assets outperform core government bonds

Inflation: Inflation remains high the first half of the year as energy prices increases filter through and supply chain disruptions are prolonged by elevated demand. Inflation moderates later in the year but stays above pre-Covid norms

T. Rowe Price 2022 Global Market Outlook

Stock Market Growth: Valuations are elevated, but earnings strength buoyed equities in 2021 – although it will difficult to grow earnings at the same pace in 2022. Moderating economic growth, tightening central banks and COVID-19 uncertain pose headwinds.

Fixed Income (Bonds): Lingering inflation could keep upward pressure on yields, challenging higher quality sovereigns and longer-duration bonds. Credit Fundamentals and demand for yield are supportive, although we see limited upside potential due to current valuations.

US Growth Vs. Value (Growth vs. Growth & Income): Value’s cyclical orientation should position it to benefit from pent-up consumer demand, elevated savings, economic strength, rising rates and infrastructure spending. However, a bias toward high quality within value is warranted.

Vanguard 10 Year Market Outlook

Stock Market Growth: 4.00% US Equity Markets – 10-year estimate. The removal of policy support poses a new challenge for policymakers and a new risk to the financial markets. Central banks will have to maintain the delicate balance between keeping inflation expectations anchored and allowing for a supportive environment for policy growth

Fixed Income (Bonds): U.S. Bonds median return, in the Vanguard Capital Market Model, are 1.9%. For Fixed Income, lower interest rates mean that investors should expect lower returns. However, the fact that rates have risen modestly since 2020 means that our outlook is commensurately higher.

Inflation: Starting 2022 around 5% then drifting to the 3% range by mid-year. Wage based inflation and housing inflation will make this inflation sticker and harder to bring back down to the Fed’s 2% target range.

First Trust 2022 Market Outlook

Stock Market Growth: First Trust’s Capitalized Profit Model shows a 11.4% return from the markets close on 12/10/2021. The bottom line is we (First Trust) remain bullish, we are not quite as bullish as in recent years. We haven’t had a 10% correction in 2021 and, although we never try to time the market, we wouldn’t at all be surprised by one happening at some point in 2022.

GDP Growth: We (First Trust) expect real GDP to rise at about a 3.00% rate in 2022. Slower than in 2021 because of lower government spending but conversely the BBB tax hikes and distortionary spending are now less likely.

Inflation: It looks like the Consumer Price Index will be up in the 6.5 – 7.0% range in 2021. The consensus among economists is that will slow to 2.7% this year, but we (First Trust) think inflation will run 4.00% or more. On a granular level, look for the rental price of housing, which makes up more than 30% of CPI, to be the key driver of inflation for the next few years.

IMPORTANT: The projections and other information generated by the Vanguard Capital Markets Model & First Trust Capitalized Profit Model regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results. VCMM & FTCP results will vary with each use and over time. All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protection against a loss.