by Bryan Cannon, CFP®, host of Markets ‘N5

In a normal year, tracking the trends that influence the stock market can be tricky. From market sentiment to economic development and company earnings to natural disasters, investors and advisors must keep their eyes on a wide range of factors that have the potential to influence trading and affect the performance of portfolios.

As we enter 2022, it is already clear that this year will be anything but normal. The ongoing COVID-19 pandemic continues to disrupt the patterns that we once counted on to provide guidance. For those assessing the best course for stock trading in 2022, there are a number of key factors brought into play by the pandemic that must be considered.

Ongoing inflation concerns

Inflation in the US is at an historic high. Recent reports suggest that inflation will be the top economic issue in 2022. Exactly how it will impact stock performance remains to be seen, but it is certain that its impact will be significant.

Traditionally, stock prices are more volatile during times when inflation is high. Value stocks, which are those thought to be trading at prices that are near or below their intrinsic value, can perform better when inflation is high, whereas growth stocks, which are those that promise a higher reward while carrying a higher risk, are not great performers during high inflation.

While historic trends can help to inform investors in times of high inflation, the current situation may prove to be unique due to current inflation being driven in large part by the effects of the COVID pandemic, resulting in supply chain bottlenecks and increased transportation costs. Until the US Federal Reserve reveals how it might adjust interest rates to address rising inflation, the ultimate effect of inflation will be difficult to predict.

COVID’s lingering impact

Rising inflation is the key impact that COVID has had on the financial landscape, but it is not the only impact. Thus far the pandemic has proven disrupted in virtually every industry, with recovery in most happening slowly, if at all.

The recent Omicron variant outbreak has revived travel restrictions in many countries, causing problems for the travel, tourism, and hospitality industries. Restaurants and other food service businesses continue to be affected in dramatic ways. The entertainment industry has also been hit hard. For those sectors of the market, COVID could continue to cause disruptions until infection rates come down and stay down.

Global economic recovery

Investors were encouraged by economic indicators in 2021, such as the 6.4 percent average annual growth in the US GDP. However, the fallout from COVID continues to cast a good deal of doubt over the prospect of continued economic growth in 2022. Should Omicron result in more lock-downs and supply chain disruptions, the economy could once again become a concern for investors.

Two areas that I expect will continue to grow as 2022 unfolds are used car sales and home sales. The supply chain bottlenecks in the auto industry have slowed production of new models and raised the prices on those that are available, making used models more accessible and more desirable to shoppers who continue to face an unsure financial future. Regarding home sales, lower mortgage rates and a more buyer-friendly lending environment could continue to spur growth in real estate markets.

Facing certain uncertainty

Those looking for sound investment guidance for 2022 must understand that at this point uncertainty continues to surround some of the most important indicators. Speaking before the Senate Banking Committee on January 11, 2022, Federal Reserve Chairman Jerome H. Powell made this uncertainty clear.

“If we see inflation persisting at high levels longer than expected, if we have to raise interest rates more over time, we will,” Powell said.

What does the Fed consider “longer than expected?” And what does it mean by “over time?” The answers to those questions will contribute significantly to the shape of the market in 2022. Until the answers appear, the best investment strategy will be one that embraces the certainty of uncertainty.

 

bryan cannon

Bryan Cannon, CFP®, is a seasoned stock market technical analyst with over 25 years of investment and financial planning experience. He serves as the host of Markets ‘N5, a bi-weekly video series focused on analyzing market trends. Bryan’s career covers a diverse range of investment and securities experience ranging from financial and estate planning for high and ultra-high net worth families, as well as senior and partner roles with Wall Street firms and smaller boutique firms.

 

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