Stock Market 2022: Farsightedness, Patience and Strong Nerves are Required

Investors started the new stock market year cautiously. High inflation figures in the USA, a stronger than expected withdrawal of liquidity due to halving of bond purchases by the US Federal Reserve and, finally, the pandemic headlines are curbing the desire to buy. But while the risk of further variant outbreaks exists, the world is now better prepared, whether through effective and adaptable vaccines, the expansion of acceptance and approval of vaccines for children, booster vaccinations, or the growing range of therapeutics.

On the other hand, inflation, interest rates, corporate profits, and general sentiment will be decisive for further market development. Overall, in our opinion, 2022 will stand for the global recovery, the end of the pandemic, and a return to pre-Covid-19 normality.

The US inflation rate of the last quarter rose to 7%, a level which have not been reached since 1982 (!). Demand has recovered faster than supply leading to higher commodity prices accompanied by lack of labor and shortages of many goods. Inflation expectations are exceeding the expectations. Against this backdrop, the return prospects for fixed-income securities remain unattractive.

However, the withdrawal of liquidity due to the halving of monthly bond purchases to US$ 60 billion announced by the US Federal Reserve is a greater challenge than inflation and the markets still have to adjust to this. In the long term, however, this return to normality can be seen as stabilizing, since rising capital costs are preventing the markets from exaggerating and liquidity will no longer tend to be channeled into unprofitable projects.

For selected stocks, we tend to see the rising inflation figures as positive, because they mean stable or even rising profit margins for the dominant companies in the respective industry. An increase in profit dynamics to the same extent depends, among other things, on the extent to which one’s costs increase or can be passed on. Overall, equities continue to offer better return potential than fixed-income securities but in view of the advanced bull market and the sometimes very high valuations, such as in the US large-cap stock market, we recommend a very hard selection. Only strong companies with stable corporate profits, high cash flow, low debt, and a clear growth model justify even higher prices. In an environment of still-low interest rates, inflation and corporate earnings growth, the stock market could see further gains over the next few years, but investors should be more prepared for mid-single-digit annual returns.

Good economic prospects, low inventories, and comparatively low supply meeting strong demand also point to a second consecutive year of positive double-digit commodity returns, which should also have a positive impact on cyclical currencies such as the Canadian dollar.

Considering the challenges created by the new framework conditions, it remains important and crucial for long-term investors to stick to a clear investment strategy even in turbulent times to adapt the portfolio to the new realities (“rebalancing”), to be sufficiently diversified in all asset classes and parking cash on the sidelines to be able to buy “quality” in the event of major corrections at a lower price.