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Investing

Will a new year bring new concerns for investors? 

No matter what 2022 brings, here are three resolutions for investors to follow throughout the year.


 

Our Top Market Takeaways for Jan 7, 2022.

Market update

For auld lang syne. This week, investors were focused on the Federal Reserve and Omicron. Sound familiar? It does to us.

We will start with the more negative market news from the Fed first. The minutes from the Federal Open Market Committee’s meeting in December suggested that less supportive monetary policy is right around the corner. Rate hikes seem likely this year (maybe even as soon as the March meeting, when asset purchases are set to end), and the Fed hinted that they may even let their balance sheet shrink soon after.

Interest rates across the curve rose. 10-year yields are close to their March 2021 highs, and 2-year bond yields are at their highest level since policy rates were cut to zero in response to the initial COVID crisis. In equities, the highest valuation, fastest growth stocks were hit the hardest (the NASDAQ Composite lost 3.5%), while stocks levered to cash flows in the here and now (like energy +9.0% and financials +4.2%) outperformed. 

Now for the more positive news. It has been 6 weeks since the Omicron variant started to take off in South Africa, and the evidence suggests that the wave will be manageable from an economic and market perspective. New cases in Gauteng (Johannesburg) are down over 80% from the peak in early December. In London, new case growth has slowed without a rise in hospital patients requiring ventilation. In San Francisco and New York, the test positivity rate has plateaued, which has presaged a peak in new case growth. It will be a pain to deal with staff shortages, school closures, testing backlogs, and event cancellations, but vaccines and prior immunity seem to be reducing the severity of the disease and provide a path towards a more normal social and economic environment.

While it may be a new year, many of the same issues are facing investors. To help guide through what is still a hectic investment environment, we are going to try to stick with three New Year’s resolutions. 

Three New Year’s Resolutions for investors

1. Don’t fear the Fed too early. Central banks are a critical input into investment outlooks because they control the cash interest rate on which all other financial assets are priced. They move this rate around to try to impact the economy as a whole. When the economy is overheating and inflation is too high they move the cash rate up to try to get people to take money out of risky things and into cash. In the past, they have moved the rate too high and caused recessions that are 1.    characterized by rising unemployment, credit defaults, and equity bear markets. Even though the Fed is getting ready to start raising cash interest rates this year, we think they have a long way to go until they cause problems.

For one, even if cash rates end up at 1% in December, they would still be dwarfed by inflation. 1% is better than 0%, but losing purchasing power by staying in cash isn’t attractive. That will incentivize spending and investment. Next, long term rates (like mortgage rates) have to move higher too. The housing market is very important and very interest sensitive. Right now, most outstanding mortgages have a higher rate than what you could get if you took out a new loan. That should support the housing market.

Bigger picture, the Fed usually starts raising rates because the economy has built up enough momentum to continue growing and creating inflation on its own. As the chart below argues, the start of Fed tightening cycles aren’t the time to worry, the end of Fed hiking cycles are.

THE START OF FED HIKING CYCLES AREN’T THE TIME TO WORRY

2. Focus on earnings expectations. Last year, the bears nailed inflation (hottest CPI prints in decades), COVID variants that dent vaccine efficacy (Delta and Omicron), and the speculative retail bubble (down 40%-80% from peaks). The issue for the bears is that earnings also grew by over 45% year over year, which took investors by surprise and drove a 30% return in the S&P 500.

We think that corporate earnings are probably still being underestimated. Right now, consensus expects S&P 500 earnings per share to grow by 9%, which isn’t too shabby. The problem is that 9% earnings growth is probably inconsistent with our outlook for the nominal growth environment, which should be closer to 5%-7%. In other recent years where nominal GDP grew by 5%-7%, earnings grew by 15%-20%. We think earnings will continue to drive stock markets to new highs.

3. Find the new trends. Many of the hottest market trends of the pandemic era are now passe. The stay-at-home beneficiaries like Teladoc, Peloton, and Zoom are 60%-80% below their early 2021 peaks. SPACs and solar companies are doing a little better, but not by much. Meme stocks are already down almost 9% this year. Gold, which rallied 80% from March to August 2020, has barely been treading water for the better part of the last year.

This year, new trends are starting to emerge. The most notable one, at least so far, is in the electric vehicle space. Ford broke out of a 20-year trading range after announcing that it was doubling production capacity of its new electric F-150 Lightning. Volkswagen and Toyota are likewise gearing up to spend billions and take on Tesla. While we won’t offer our take on who will end up winning the EV wars, we will note that investing in companies that enable EVs (like semiconductors and industrials that are critical for charging infrastructure) could be an attractive opportunity. Another sector that could do well as the expansion continues, the Fed raises rates, and long term rates continue to rise? Banks. US bank stocks closed at an all-time high on Thursday. But now we are just rooting for the home team.

For more on how these dynamics might impact your plan and portfolio, please get in touch with your JPMorgan team.

 

All market and economic data as of January 2022 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.

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IMPORTANT INFORMATION

Our Top Market Takeaways for Jan 7, 2022.

All market and economic data as of January 2022 and sourced from Bloomberg and FactSet unless otherwise stated.

We believe the information contained in this material to be reliable but do not warrant its accuracy or completeness. Opinions, estimates, and investment strategies and views expressed in this document constitute our judgment based on current market conditions and are subject to change without notice.


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