Investors prepare for test of nerves in 2022

Now is the season to pontificate whether stocks continue to rise in 2022, and if so, at what rate. The problem is, this is a delicate question.

So how do you answer them? For demanding market experts who honestly have no idea what’s going to happen next, “uh, I don’t know, it depends” is the wrong answer.

The penultimate resort is to use precise probabilities. “60% chance of Greece leaving the euro” was a classic of its kind among economists of the European debt crisis. The equivalent now would be to identify a 60% probability that the stock markets will collapse. Sixty is your sweet spot here – a number high enough to sound serious and sing it out for the rest of your career if you’re right, but low enough to give an exit if it doesn’t.

If that doesn’t sound right, analysts and investors can fall back on the last resort: predict volatility. The markets will not necessarily be higher or lower, but volatile. Normally this is a dodge. It’s “I don’t know”, but in terms of the market.

But in this case, “it will be volatile” is a reasonable and intellectually honest position for the analyst or investor who is paid to make predictions without more foresight than anyone else, and who knows that the Overall withdrawal of monetary stimulus is likely to be a messy process.

This is why words like “agility” and, of course, “volatility” are dotted around the outlook for 2022. Investors and analysts expect weaknesses known as “drawdowns” and “pullbacks.” .

Policy makers are also paying attention to this. At its last press conference in mid-December, the Swiss central bank noted “signs of overvaluation on the stock and property markets in various countries”. He continues, “At the same time, the global public and corporate debt is high. These vulnerabilities make financial markets more sensitive to shocks, in particular to sharp increases in interest rates. “

This is a new phase for the financial markets. First of all, at the beginning of 2020, the crisis phase arrived when the pandemic struck for the first time. Then came a period of runaway stock returns after central banks flooded the system with stimulus to prevent the market crash from turning into an even deeper economic crisis. Soaring inflation was not enough to derail central banks, even though they had to throw the claim that inflation was “transient” into the dustbin of monetary history.

Now we have time to crack. Yes, uncertainties persist. The coronavirus clearly still has some nasty tricks up its sleeve. But one thing we do know is inflation is way above target. Among the most influential central banks, the Bank of England has already responded with a rate hike, not without controversy. In the United States, the Federal Reserve has indicated its intention to do the same, several times, next year. The European Central Bank has announced plans to end one of its asset purchase programs by March.

“It’s going to be a turbulent year” as all stimulus packages run out, said David Riley, chief investment strategist at BlueBay Asset Management. “It might be a cliché, but we are in a world where most assets seem expensive by historical standards. The good news is in the price, but we are entering a cycle of global tightening. There is no valuation cushion.

Riley adds, “I’m optimistic about growth, in general. China and Covid are clearly extreme risks. But I think it’s going to be “meh” when it comes to the markets. It will be a difficult year for the markets to do well, and even more difficult to choose the right places.

Along the way, expect some hiccups. In 2021, withdrawals were very low. The S&P 500 index of blue-chip U.S. stocks fell more than 2% in one day, a total of five times throughout the year, despite all the outbursts of the Covid-19 drama. The emergence of the Omicron variant barely left a mark after a few days.

“The takeover phase is over,” said Norman Villamin, investment director of the wealth division of Union Bancaire Privée. “We are now entering a minicycle. Granted, that doesn’t mean big returns. I’m not too worried about stagflation because investments are up, productivity is up, relocation is boosting business spending, ”he said. In addition, the green energy revolution demands higher business expenses. Villamin expects decent returns of 8-10 percent in 2022 but – and this is an important but – “with larger drawdowns.”

An extended period looms in which the Fed pulls out, waits to see how the markets react, and then potentially abandons immediate tightening plans for fear the market will falter again and turn into real-world pain.

Stocks still make sense to anyone who doesn’t have to hold government bonds for whatever reason, which earns next to nothing or less than nothing once inflation is factored in. But stocks will test the nerves of investors.

“There are going to be bouts of volatility next year and that takes a bit of the humble pie,” said Kasper Elmgreen, head of equities at Amundi in Dublin. “It’s a bit cheesy to say, but the range of results is quite wide. “

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