Jurrien Timmer, Fidelity’s global macro director, believes that stocks are poised to deliver positive returns next year, but not as much as they did this year, due to a slowdown in earnings growth and a tightening of monetary policy by the U.S. Federal Reserve.
“Since the brief-but-sharp 35% decline almost 2 years ago, US stocks have risen to record highs, thanks in part to the timely and massive fiscal and monetary policy response to COVID-19 and the resulting lockdowns,” noted Jurrien Timmer, director of global macro in Fidelity’s Global Asset Allocation Division.
“Now as 2022 begins, I expect the markets to mean-revert back to trend-like growth, and for the Fed to take the first steps on the road back to a neutral monetary policy,” he added.
Earnings are expected to slow down next year after a strong 2021. In light of the newly hawkish U.S. Federal Reserve and the ever-evolving virus, analysts and investors are having a difficult time gauging the future direction of the stock market.
With the high inflation rate, investors are facing more uncertainty as they attempt to justify record stock prices, and the fast-spreading new Omicron variant is putting an end to the optimistic hopes that the global economy would improve by 2022.
While these factors are in play, the S&P 500 have risen about 28% so far this year, and the index’s P/E ratio is above its long-term average, which raises concerns about overbought conditions. A forward price-to-earnings ratio of 21.3 significantly exceeds the long-term average of 15 for the S&P 500.
“While 2022 will likely be a positive year for stocks overall, it’s less clear how various types of stocks may perform. In 2021, growth stocks and value stocks took turns outperforming each other and that could continue in 2022. If interest rates stay low in 2022, growth stocks could well continue to dominate because value tends to be more of a play on inflation,” Fidelity’s Timmer added.
“Should we have both? Interest rates matter a lot for how this will play out. For investors there’s not much reason anymore to buy bonds for their yield (nominal or real), other than for their diversification benefits. The diversification effect or ability of bonds to protect against drawdowns in stocks remains proven,” he added.
As stock market trends continue to change rapidly in the pandemic world, it is becoming increasingly difficult to predict future stock performance, especially with analysts and investors dealing with hawkish central banks, on the one hand, and the risk of a further economic shutdown on the other.
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This article was originally posted on FX Empire
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