While some of the same problems from 2021 will likely affect markets in 2022, there is likely going to be a shift in market returns from out-of-favor sectors. With the likelihood of 3 rate hikes from the Fed this year, interest-rate sensitive stocks may out-perform.
Financials, for one, should see better profit margins as interest-sensitive accounts will provide a windfall of better revenues. As interest rates rise, expensive sectors, such as Technology, are likely to take a back seat to other sectors.
Equity markets enjoyed record high closes in 2021. However, much of that was driven by a concentration of stocks. The FANG+ stocks, 10 technology-related stocks that make up more than 25% of the S&P 500, saw gains of 20% in 2021.
As previously stated, that kind of return in light of higher interest rates is unlikely this year. Instead, look for rising inflation to continue to push commodity and raw material prices higher. Industrials, Basic Materials, and Energy should be the sectors that benefit in that type of environment.
There wasn't much activity to report on the economic front last week. The job market continued to improve as Weekly Jobless Claims (initial) and Continued Claims both made lows for 2021 and dipped below pre-pandemic lows going back to early 2020. Redbook Sales showed that the U.S. consumer was strong going into the last two months of the year. The behavior of consumers going forward will be critical in determining the rate of corporate profits in 2022. Remember, the U.S. consumer comprises 2/3 of U.S. GDP. If higher inflationary costs and higher interest rates were to cause U.S. consumers to pause in discretionary spending, corporate profits and GDP would almost certainly decline. Corporate profits saw a an increase of 45% in 2021. Analysts are expecting a more modest increase of 9% this year. Not a bad number, but should lead to high single digit returns for equities this year.
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