The new year is off to a very rough start for major global equity markets. The S&P 500 and NASDAQ Composite are down over -7% and -11% respectively in the first 3 weeks of trading. Meanwhile, the S&P/TSX Composite Index has held up relatively well off about -3%.
Since the 2008 global financial crisis, Central Banks around the world have basically had zero (or near zero) interest rate policy. Add this to the fact that we’ve had a whole generational period where inflation had been contained and a non-factor. Today, Central Banks are expected to raise rates and inflation is suddenly real again.
Our 2022 outlook has considered these changes and we’ve adjusted our sails accordingly as any astute navigator would do. What may have worked with the wind at your back may not work with it in your face.
We forecast continued volatility in the first half of 2022, as markets prepare for rate hikes and keep a keen eye on inflation and supply chain issues, but we expect strength in second half to close out the year as the some of these issues taper off with the possibility of a “less hawkish” or even a dovish Federal Reserve towards the end of the year.
We are overweight Energy, Materials and Healthcare where valuations are attractive and, in some cases, do well in an inflationary environment. We are still long-term bulls on the Technology sector but:
- expect a bumpy road in the short term and
- are more focused on large cap names with earnings vs the thematic high growth/multiple names.
The winds of change are here, and the scary thing is a lot of investors and even investment professional today have never been in this new environment. Adjusting your sails or working with an experienced captain who’s been through these waters can be essential.