- Most asset classes produced strong returns in 2021, though rising rates nicked high quality bond performance.
- Next year’s outcome is likely to hinge on inflation and the Federal Reserve’s (Fed) response.
- Investors are hoping that policymakers can strike a balance between slowing, but still above-trend growth and inflation.
Investors are hoping for a return to normal in 2022
We’re likely to see more volatility in the coming year as markets navigate concerns about easy financial conditions against a backdrop of above-trend growth and inflation. Companies will have their work cut out as growth slows from heady levels and price pressures continue.
After weaker-than-expected Q3 gross domestic product (GDP) growth, we anticipate a strong finish to the year and slower, but still above-trend, growth in 2022. An agonizingly slow normalization of the economy continues to present unique challenges to forecasters. New variants continue to pop up, and supply chains are still out of whack. Another year of higher-than-normal investment and stronger imports could ease the supply situation, but Omicron may slow this process. Consumer spending is likely to be robust as the continued overhang of unspent savings and investment gains propels growth next year. Even so, the handoff from public support to private employment isn’t complete. A lack of willing workers is a headwind, stemming from early retirements, lower immigration, and persistent pandemic effects. We believe the labor market will stabilize next year, but with tighter conditions than the pre-pandemic balance. So far, companies have been able to push through price increases to maintain margins, but resultant inflation has been higher and more persistent than expected. Consumers are frustrated that key financial goals like home ownership or a new car purchase feel more out of reach as wage increases fall short of inflation. We’re not too worried about a recession, but weaker consumer sentiment and a tight labor market are likely to continue to pressure policymakers and employers.