Be prepared to hear the term “cautious optimism” a lot over the next few weeks. It’s a catch-phrase economic forecasters tend to favor at any given time, but especially when a new year is near. Translation: While there’s much to be hopeful about, there are many uncertainties as well. So far, that appears to be 2022 in a nutshell.
Not long ago, the prevailing opinion seemed to be that the pandemic was on its way out, and as life returned to normal, employment numbers and the overall economy would come roaring back. Instead, there’s a new Covid variant to worry about, the recovery may be slowing, inflation could keep rising, and the Federal Reserve will likely start raising interest rates sooner than expected.
What does all this ambiguity mean for investors moving forward? Challenges and opportunities. Here are some things to keep an eye on as we head into 2022.
Rising prices have been wreaking havoc on household budgets for several months now, and it doesn’t look as though inflation will be slowing any time soon.
According to the Bureau of Labor Statistics, the Consumer Price Index soared 6.8% year-over-year in November, exceeding the 6.7% forecast. That reading reflects the fastest pace of price growth since 1982.
Citing persistent inflation, the Federal Reserve announced Wednesday that it plans to speed up the tapering of its bond-buying program, also known as quantitative easing. Fed members also indicated that, in an effort to cool things down, we could see three interest rate hikes in 2022.
What might those moves mean for the markets? That’s a complicated answer, but if borrowing becomes more expensive, and businesses and consumers cut back on spending, it could cause earnings to fall and stock prices to drop.
Though the November jobs report was disappointing, with fewer new jobs being added to the economy than predicted, there were some bright spots. The unemployment rate dropped from 4.6% to 4.2%—a historically low level (though still higher than the pre-pandemic jobless rate of 3.5%). And the labor force participation rate, which measures the share of people who are working or actively looking for work, edged up to 61.8%—the most since the pandemic started in early 2020.
It’s also worth noting (with a bit of cautious optimism) that the net new jobs number for November still could be revised upward by the Bureau of Labor Statistics, as it has been in previous months. From January to October, the U.S. created nearly 1 million more jobs than the government originally estimated.
Omicron and Potential Future Variants
It’s difficult to predict how the U.S. and global markets will react as researchers try to get a handle on the potential health consequences of the Omicron variant and possible future coronavirus variants. We do know, however, that uncertainty often leads to market volatility.
The Dow Jones fell more than 1,500 points in late November, triggered by renewed concerns about Omicron, then quickly rebounded in December. If new variants emerge and slow spending in industries already hit hard by the pandemic, such as hospitality, leisure, entertainment, and tourism, we could see similar market reactions in the new year. Supply chain bottlenecks, which have just started easing, also could become an issue again, if U.S. and overseas factories close.
Citing risks and uncertainty around the emergence of the Omicron variant, Goldman Sachs cut its outlook for U.S. economic growth in 2022 from 4.2% to 3.8%.
How Can You Prepare for Changes in 2022?
Investors have experienced some scary lows in the last couple of years, but also plenty of exhilarating highs. If you’re like many investors, even if you have a plan, you may not know exactly where you stand at this point.
The end of the year can be a good time to review your goals and evaluate your portfolio. It’s especially critical to look at rebalancing during times of heightened volatility.
With all the ups and downs of the past two years, the balance of your investments may have moved, or “drifted,” with some asset classes performing better than others. It may be necessary to rebalance your portfolio to get your asset weightings back in line with the allocations you originally targeted based on your risk tolerance and financial goals.
Also, if you’ve never had your portfolio stress tested, or if it’s been a while, you may want to consider it now. Your advisor can help you assess how your nest egg would hold up under a variety of scenarios—including a serious market downturn or recession.
Consistently investing in a diversified portfolio can be key to surviving—and even thriving—during uncertain times. As we move into a new year, why not resolve to review your objectives and update your plan? Talk with an Octavia wealth advisor today.inflationinterest ratesInvesting