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Market & Economic Outlook

Market Commentary - Q1 2022

8 Minute Read

As a new year begins, we see three key investment themes to watch going forward: the Federal Reserve’s pivot to reverse 2020’s unprecedented monetary stimulus measures; inflation soaring to a 40-year high; and the challenge of maintaining the recovery even as the economy faces various headwinds, such as an overstimulated economy.

The Big Unwinding

The Fed’s intention to end its bond-buying program late in the first quarter of 2022 marks the beginning of a cycle of tightening the monetary reins. We expect that the Fed will raise short-term rates by 50 to 75 basis points over the course of two or three hikes in 2022 to tame building inflationary pressures.

Quantitative tightening—shrinking the Fed’s balance sheet through slowing the reinvestment of maturing securities—should also commence in 2022. Central banks around the world also might cut back on aggressive monetary stimulus programs and consider rate hikes of their own.

  • A return to positive real yields  may be a welcome change for investors whose income depends on risk-free U.S. Government bonds. Negative Real Yields - 10 Year Treasury Yield Chart
  • A significant move higher in longer maturity interest rates may be tempered by investor demand abroad. Specifically, demand from Asian and European investors for government bonds with higher yields than their domestic equivalents may put a ceiling on our interest rates if both U.S. and foreign rates don’t move in tandem.
  • The removal of monetary accommodation, especially during a lingering pandemic, could dampen economic recovery prospects if done too aggressively

A Tale of Two Inflations

A nearly 40-year peak in inflation rattled investors during 2021.  Looking beneath the headlines, however, the primary sources of inflation—pandemic-related supply chain and production constraints as well as demand for goods and demand for services—followed different paths. Flush with stimulus cash and built-up savings during the pandemic, shoppers went on a buying spree while demand for services was nearly unchanged versus prior periods.

But the worst of goods-driven inflation may be behind us if supply chains and production constraints normalize and consumer-savings levels continue to decline,  while cheap credit due to low interest rates slowly wanes.

  • We expect core inflation to have run its course and settle lower by the end of 2022 to an annual rate of around 2.5%.
  • Supply chain disruptions should ease in 2022 although the timing and extent is uncertain.

Looking for Goldilocks

The Fed faces a daunting challenge and inflection point as it attempts to begin a tightening regime while simultaneously seeking to deliver on its two mandates of maximum employment and price stability. Too much tightening too soon could choke economic growth and, potentially, lead to recession. But tepid rate hikes could do too little to reduce inflation while leaving the Fed with a too small supply of “dry powder” to fight future downturns.

A “Goldilocks”  monetary approach will be a challenge given the Fed’s narrow range of policy options. Complicating matters further, data the Fed relies on to make decisions have been whipsawed by the pandemic.

  • Regardless of how rapidly the Fed seeks to tighten economic conditions, COVID-era stimulus measures will impact the economy for some time before they are washed out.
  • The potential for a Fed policy misjudgment, such as too rapidly draining bank reserves built up during quantitative easing, could be high going forward.
  • The Fed is expected to keep close tabs on bond market reactions to its changes and is more aware than ever that a change of course may be required if markets view its moves as too harsh too soon or, conversely, not enough or too slow. 

Looking Ahead

U.S. equities, as measured by the S&P 500 Index, ended the year on a record high. We believe that corporate earnings growth rates will remain positive in 2022, but rising rates might put a damper on stock valuations and earnings-per-share growth. Similar to prior record equity market peaks, we expect 2022 to be marked by more moderate advances. 

Fiscal stimulus uncertainty, particularly the on-again, off-again Build Back Better legislation, could continue to perplex markets in 2022 as will the ongoing pandemic. The knock-on effects of a more hawkish Fed may be another headwind as rate hikes are often seen as negative for stocks.

  • As global central banks let the air out of ballooning balance sheets, volatility across asset classes might increase, but we expect above-average global economic momentum to continue despite the headwinds of the pandemic and an overly-stimulated global economy.
  • The continuing rise of positive COVID-19 infections as the Omicron variant spreads is akin to two steps forward, one step back and represents an additional headwind to risk asset performance. But reports indicate that Omicron’s less deadly effects on those vaccinated may help bring us closer to herd immunity and the end of the worst of the pandemic.
  • Equity valuations will be scrutinized and we anticipate a shift from the growth names that dominated 2021’s 28.7 percent total return for the S&P 500  to more cyclically-sensitive stocks that underperformed during the pandemic, including small capitalization value and international equities. 

The Private Bank assists clients with a variety of customized investment solutions to help meet long-term objectives. Contact your relationship manager to discuss the strategy that is best for you.


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Economic and Market Perspectives is a publication of HighMark Capital Management, Inc. (HighMark). This publication is for general information only and is not intended to provide specific advice to any individual or institution. Some information provided herein was obtained from third-party sources deemed to be reliable. HighMark and its affiliates make no representations or warranties with respect to the timeliness, accuracy, or completeness of this publication and bear no liability for any loss arising from its use. All forward-looking information and forecasts contained in this publication, unless otherwise noted, are the opinion of HighMark, and future market movements may differ significantly from our expectations. HighMark, an SEC-registered investment adviser, is a wholly owned subsidiary of MUFG Union Bank, N.A. (MUFG Union Bank). HighMark manages institutional separate account portfolios for a wide variety of for-profit and nonprofit organizations, public agencies, and public and private retirement plans. MUFG Union Bank, a subsidiary of MUFG Americas Holdings Corporation, provides certain services to HighMark and is compensated for these services. Past performance does not guarantee future results. Individual account management and construction will vary depending on each client’s investment needs and objectives. The benchmarks referenced in this piece are used for comparative purposes only and are provided to represent the market conditions during the period(s) shown. Benchmark returns do not reflect the deduction of advisory fees, custody fees, transaction costs, or other investment expenses, but the returns assume the reinvestment of dividends and other earnings. An investor cannot invest directly in unmanaged indices. Investments employing HighMark strategies: • Are NOT deposits or other obligations of, or guaranteed by, the Bank or any Bank affiliate • Are NOT insured by the FDIC or any other federal government agency • Are subject to investment risks, including the possible loss of principal invested.