2022 Stock Market Predictions

2022 stock market predictions are common to start a new year. Not surprisingly, Wall Street loves to parade out fund managers and analysts with their crystal balls and pixie dust. Well, I think this year I will do the same with the warning that I’m a flexible investor, so my opinion does change if the facts change.

Moving forward, we need to establish the narrative driving markets at the moment. Indeed, having a clear understanding current market sentiment is helpful. As we work towards growing our wealth it is paramount to ensure risk is kept in check. To do so, we must understand the current state and project what might happen in the future and plan risk accordingly.

2022 Stock Market Themes:

Red hot inflation
Negative real interest rates
Imploding Chinese stock market

Inflation

How hot is inflation? Well, the PCE price index is currently 4.7%. In the same fashion, the Consumer Price Index is running at 6.8% YoY. To be sure, it would be logical to assume monetary tightening is on the horizon.

Negative Real Interest Rates

In my opinion, the chart below best summarizes the challenge facing investors. That is to say, anywhere along the maturity timeline, US treasuries (and fixed income in general) are a losing investment after taking inflation into account.

Surely, this is the main driving force behind the relentless bull market in equities. However, how long can this dynamic play out? Can negative bond yields driving stocks ever higher? I don’t think so. But, shorting equities just because their valuations appear high relative to bonds is a bad idea. Or, a great way to lose money.

Carenage in China Equities

Taking a look as EM equities like China reveals a polar opposite view compared to US equities. Chinese stocks are in a bear market, FXI down about -32% off its February 2021 highs. This is an interesting dichotomy.

At this point I think a rotation out of US equities into EM equities like China is premature. Back in November 2021 I tested my luck in BABA based on this thesis, but was stopped out after two days holding the trade. Going forward, I think the missing piece to this trade is weakness in the USD. If the dollar weakens I will put this trade on again.

Conclusion

Inflation is a real problem right now. By all means, balancing risk and beating inflation has become nearly impossible in fixed income. Overall, rates should be much higher but are being artificially suppressed by Central Bank monetary policy. So, until we actually see meaningful tightening, either by Quantitative Tightening or rate hikes, equities will continue to move higher.

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More information on US Treasuries can be found here –>

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