Predictions for the Stock Market in 2022

A man looks at stock quotes in Beijing
Credit: Jason Lee / Reuters

For most of my life I have been in the predicting business. Between my time spent in dealing rooms and now, as someone who writes about financial markets, I have been attempting to predict the future for nearly forty years. Most of that, though, is short-term. In the spot foreign exchange market where I started, we were only concerned with where one specific currency pair would be in a few seconds or minutes. Even now, my predictions are judged based on where a stock or the market will be in a few days or maybe weeks after publication. Because of that, my research and analysis are usually geared towards the short-term, but at this time of year, I have to switch gears and attempt to look a full year ahead. This is difficult to do, if not impossible, and at times, seems a bit pointless.

It is not that I haven’t done it in the past, or that I haven’t had some success overall. Last year, for example, I predicted strong double-digit gains in the major indices and highlighted some big winners such as Microsoft (MSFT), Nvidia (NVDA) and AMD (AMD) as individual stocks to consider. It’s just that as a rule, what really drives big moves in markets are surprises: things that no one predicts way ahead of time. Still, if you ignore that and look at the most likely scenario for stocks in 2022, it is possible to draw some conclusions.

Last year, I said that even though we were at record highs, there would be further gains for one main reason – liquidity, both monetary and fiscal. The Fed was still keeping rates ultra-low and pumping money into the system to combat the effects of COVID, while a newly elected Democratic White House and Congress seemed intent on trying to spend their way out of a recession that was basically already over at that point. As we head to 2022, we are once again at record highs, but the liquidity picture looks very different.

Persistent inflation has forced the Fed to change course. They are reducing their asset purchases, or to put it in layman’s terms, creating billions of dollars less new money every month to give to banks, while rate hikes by the middle of the year now look almost certain. On the political front, things are changing too. As I also predicted in that article, Republicans suddenly became rabid fiscal hawks when a Democrat was in the White House. What has changed though, is that they have now been joined by enough Democrats to stymie the more aggressive spending plans of the far left.

So, as we come into this year, the primary external drivers of market gains, monetary and fiscal stimulus, are going away. For stocks in that scenario, record highs and stretched valuations are hard to maintain. Throughout 2021, even as COVID resurged and inflation took hold, everything was underpinned by vast amounts of cash. Remove that, as will happen this year, and the negative effects of disruptions will be more severe and last longer.

So, the obvious question for investors is “will there be any negative events?” The equally obvious answer to that is yes. There are always also some negatives in a period as long as a year. However, there are also a few specific reasons to believe that stocks will come under pressure in the coming year.

The reduction in liquidity is a known factor but if the Fed gets it anything less than perfectly right, they will find themselves tightening as growth declines, and the market will fall drastically. Investors should also keep in mind that it isn’t just the Fed that is trying to navigate a tricky course correction. Other central banks will be doing the same, and we are already seeing a few signs that in some cases that may not go smoothly.

The Chilean central bank, for example, just raised rates to its highest since 2014, while also raising its inflation forecast. That suggests that the central bank felt it couldn’t hike by as much as they needed to, and that further rate hikes are coming. That in itself may not seem very significant to most U.S. investors, but we live in a connected, globalized era, and if that struggle to contain inflation is repeated in other countries, even relatively small ones, it will inevitably find its way here no matter what the Fed does.

Meanwhile, on the fiscal side, we have already seen Republicans threaten a default in Treasuries by not raising the debt limit and flirting with the idea of a government shutdown by not opposing basic spending bills. If the Democrats continue to fight with each other, weakening themselves from within, either or both of those things will come back into focus, causing a big drop in stocks.

There are other risks too. As I hinted yesterday, there are potential flash points with both China and Russia. With the Olympics coming to China, there will probably be diplomatic protests aimed at that country’s human rights abuses, and let’s face it, the Chinese Communist Party isn’t exactly known for taking what they regard as insults well. Some retaliatory measures on trade and economic cooperation or some saber rattling in their own back yard would come as no surprise, and either of those could push stocks lower.

Talking of saber rattling, I hope that is all Russia is doing right now on their Ukraine border, but I suspect it is more than that. Putin seems to feel that now is a good time to get more aggressive. He showed last year that he can hurt much of Europe at will by restricting energy supplies. Meanwhile, in the U.S., you have a President whose popularity is plummeting, a dysfunctional governing party who can’t agree on and pass their “signature” legislation, an opposition whose more extreme elements attempted an actual coup and an overall weakening of the concepts of truth and facts that would make Stalin and Goebbels proud.

On balance then, there are, as always, numerous risks to stocks going into the New Year. What is different this year, though, is that those risks must be navigated in an environment where purse strings are being tightened, both fiscally and monetarily. That means deeper drops and longer recoveries when things start to look bad, and that makes me pessimistic for the year ahead. I wouldn’t be at all surprised if the major indices all have down years.

I said earlier that I find these kinds of predictions not just hard, but also a bit pointless, and here’s why. Even though I suspect that 2022 won’t be a great year for stocks, I’m not about to do anything about it. My long-term investments look beyond a year, and history shows that if the market has a below par year or even a negative one, the best thing long-term investors can do is just ride it out. So, I won’t be making any major changes as I peer into my crystal ball. What I will do, though, is keep a close eye on the global inflation picture. That, staying alert and hedging quickly when things look dire, which they almost certainly will at some point, seems to be the best strategy for what looks like will be a stressful year for investors.

And, on that somewhat unhappy note, and fully aware of the irony, I wish you all a Happy New Year!

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

Martin Tillier

Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.

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