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2022: A Year of Cautious Optimism

2022: A Year of Cautious Optimism

March 02, 2022

While we are only two months into the new year, elevated volatility levels can make the previous year’s returns seem a distant memory.

The economy and corporate profits have both experienced continued growth but developing headwinds are threatening to overshadow these positive revelations. Anticipated rate hikes, Russia’s incursion into Ukraine, and continuing inflation will disrupt the markets as the year progresses.

Here are some of the developments our team has been tracking, along with how they could impact the markets going forward.

Rising Inflation and Volatility. The current, well-documented inflation trends we have been seeing have arisen through broken supply chains. The Federal Reserve indicated it was lagging on changing and adjusting economic policies to these factors. The agency ultimately signaled that it would be making some significant policy changes on interest rates and balance sheet reductions. These problems help explain the volatility we have experienced to start the year, and we believe this will be investors’ biggest fear as we continue through 2022.

Interest Rate Hikes. The 10-Year Treasury yield has increased substantially since early December and has reached two-year highs. This development roiled the equity markets, especially after the Fed signaled that it expected to hike interest rates multiple times and reduce pandemic support measures. These developments, however, do not necessarily portend a dire year. During the last four times the Fed operated amid rising interest rates, the equity markets experienced positive returns, mainly driven by technology companies.

Attractive Small-Cap Investment Opportunities. Currently, small-cap stocks present a significant investment opportunity, with a level of underperformance not seen since the late 1990s. Last year, the Russell 2000 underperformed the S&P 500 by a more considerable margin than we have seen since 1998. While it is essential to be selective on small-cap stocks, there are significant opportunities for smaller, currently-underperforming companies to lead growth in the coming months.

Rising Demand for Semiconductors. As we continue developing new technologies and ways to access information, we have witnessed an increased demand for semiconductors. The technology industry is also making significant domestic investments into semiconductor manufacturing to combat global shortages. Intel, for example, announced plans to build a $20 billion complex in Ohio to match increasing demand.

Increased Consumer Spending. As a result of government coronavirus financial aid, rising minimum wages, and wage inflation, consumers are healthy and willing to spend money on products and services. This trend has resulted in consumers stockpiling more cash to invest in assets and more discretionary income for purchases. We anticipate this combination will offer a much-needed boost to the markets.

Growing Investments in Electric Vehicles (EVs). As consumer demand for EVs increases, OEMs such as Ford and GM have announced significant investments into building new EV manufacturing plants and upgrading existing facilities, particularly in rural areas. These initiatives also encompass collaborations with the government to build out charging network infrastructure and restore manufacturing activities. These initiatives reflect domestic efforts to lessen the U.S.’s reliance on foreign energy amid supply-chain complications.

Importing Issues. The U.S. has also been heavily reliant on imports in this current market environment. With economies reopening, we anticipate that demand for imports will only grow. That being said, importing goods into the United States has remained a challenge. Far East Westbound trade routes concluding in early December 2021 took 108 days to complete, while Transpacific Westbound routes took 105 days. By comparison, these routes took 56 days and 48 days, respectively, in the 12 months leading to February 2020. With crates of backlogged inventory still stranded at sea, suppliers’ pricing power will likely impact shelf-product pricing based on demand and available inventory.

How Early 2022 Q1 Developments Could Impact the Rest of the Year

Current market conditions have only reinforced the importance of not pursuing a reactionary strategy. After all, the markets respond best to economic and corporate earnings growth. With the IMF projecting global growth at 4.4% in 2022 and corporate earnings set to achieve new records, we still view 2022 with much promise and possibility despite the challenges inflation, interest rate hikes and supply chain issues currently present. JK Investments Group will continue to position our clients to help ensure their portfolios maintain strong performance as market conditions continue to evolve.

Securities offered through Regulus Financial Group, LLC. Member FINRA/SIPC. Investment advisory services offered through Regal Investment Advisors, LLC, an SEC Registered Investment Advisor. Registration with the SEC does not imply any level of skill or training. Regulus Financial Group, LLC and Regal Investment Advisors are affiliated entities. JK Investment Group is independent of Regulus Financial Group, LLC and Regal Investment Advisors.