Many of us have fond memories of piling into the car and embarking on a road trip to a desired destination. There were often ‘pit stops’ along the way—those that we anticipated, like stopping for meals or gas, and those that were unexpected, like road construction or a flat tire. Despite these short-term setbacks, we would inevitably reach our destination.
The investment landscape during the past couple of years has looked a bit like that of a road trip, complete with detours and bumps along the way. Last March marked the one-year anniversary of the pandemic, and global markets continued their recovery through 2021 fueled by vaccine rollouts, economic reopening, and strong consumer demand. In the second half of the year, rising inflation and supply chain issues made headlines, and in the last weeks of December, COVID-19 cases soared once again due to the Omicron variant. The S&P 500 rose 26.9% in 2021, marking its third straight positive year. The S&P/TSX, Nasdaq, and MSCI EAFE also finished strong, gaining 21.7%, 21.4%, and 8.8% for the year, respectively.
As we settle into a new year with the realization that it will take some time yet for the world to get a handle on the pandemic and facing the possibility of rising interest rates, it’s natural to feel nervous about the state of things. But the growth and inflationary environment remains favourable for investors.
Growth likely past peak but remains resilient.
Global growth and earnings likely peaked during the summer of 2021. Although economic activity is expected to slow and will face continued challenges including supply chain disruptions, overall, the global manufacturing environment remains in a resilient position. Companies are predicting that production will be higher a year from now and historically, a strong manufacturing sector provides a healthy environment for earnings.
Inflation enduring but softer.
The Consumer Price Index (CPI), which measures changes in prices over time, is currently at 6.8%. It’s expected to decrease but will likely remain above 3% through the summer. Inflation will continue to be a concern throughout 2022 but receive nowhere near the level of attention it’s receiving today.
Equity markets enter the “normalization” phase.
In this next stage of post-recession recovery, earnings growth will moderate but remain strong. Growth in the 10-15% range is very possible for U.S. equities while S&P/TSX earnings are expected to come down from recent elevated levels but remain attractive through the first half of 2022. Based on year-over-year earnings growth, returns in the upper single digits/low double digits are likely for the S&P 500 Index.
A well-balanced portfolio will be paramount.
Throughout the pandemic a smart strategy has been to take advantage of asset allocation and dollar-cost averaging. That approach is still wise today. A correction in the near term is entirely possible but we need to take these ‘pit stops’ in stride and focus on the road ahead to make sure we arrive at our destination.