2021 brought fruitful gains for the market, despite rising inflation and supply chain issues. In our annual economic update webinar, we discussed economic growth and where it’s projected to go in 2022, unemployment rates, consumer spending and confidence, interest rates, and how these factors impact your financial plan.
Market Insights and Corrections
We continue to be highly optimistic about the future of the stock market after their strong overall performance in 2021. The S&P 500 was the top-performing index for 2021, while investment grade and aggregate bonds saw a negative year due to rising interest rates. Energy, real estate, and the financial sector performed the best, with utilities and consumer staples at the bottom; all sectors still performed exceptionally well for the year.
Looking down the road, there are four factors we see driving the markets in 2022:
- The Federal Reserve’s decisions
- Inflation and consumer spending
- Corporate earnings and supply chains
- Midterm elections
The market was due for a correction, which we very recently experienced. We know that the market drops 30% from its high about once every five years, and that drop is a great buying opportunity. When we experience a correction, trust your strategic financial advisor, ignore the headlines, and stay the course on your long-term plan. We continue to expect a long-term bull market, even with a correction.
Consumer spending continued to grow throughout 2021, and we project the same trend in 2022. Consumer spending offers a very favorable sign for companies to be profitable, which is ultimately good for investors. The question is, can this upward trend continue at its current rate? The data suggests that consumers can and will continue to spend, as the personal savings rate is still above pre-pandemic highs. We also see that household debt service is lower than it was pre-pandemic. About half of the decline in household debt service has been reversed, which means the consumers both have cash in the bank and they have the ability to borrow. GDP was down in 2020, but made up for that loss in 2021 with an increase of 5.7% for the year.
Where consumer spending goes, corporate earnings will follow. We like companies that have a track record of making money, creating capital, and returning a portion of that to shareholders. Steadily increasing consumer spending should lead to steadily increasing earnings and ultimately benefit investors. Corporate earnings are about 25% higher than they were pre-pandemic. We are seeing corporations return to pre-pandemic stock buy-back patterns, which will provide a tailwind for equities.
The long-term economic growth trend in the United States is still intact, as we have exceeded the pre-pandemic trend line. We see supply chain issues slowly starting to resolve with inventories increasing, although this will continue to be an issue going into 2022, especially for auto manufacturers and every other company dealing with computer chip shortages.
Unemployment is now at pre-pandemic levels with weekly jobless claims essentially where they were before the pandemic. We see that the number one challenge facing businesses small and large is finding people who want to do the work. People are changing jobs at a record rate—another excellent sign for consumer confidence. Labor force participation is slowly improving for some age groups, while those aged 55 and older have fallen behind. Many have likely decided to take early retirement and are unlikely to ever return to the workforce.
High demand and low supply will always equal inflation, which is exactly what we are experiencing. Inflation for 2021 was a staggering 7%—no longer transient. Moving into 2022, we are looking at a projected 4% inflation rate. Wall Street and large corporations find it easier to pass the inflation-driven price increases on to the consumer, while smaller businesses that meet their consumers face-to-face are finding it more difficult to raise their prices.
Interest rates currently remain low but are anticipated to rise in the near future. The 10-year Treasury is up to about 2.9%, and the 30-year mortgage rate is about 5.9%. These rates are creating issues for first-time homebuyers coming into the market. They are faced with low supply, high home prices, and increasing interest rates. They’re struggling to come up with the required down payment for a mortgage, let alone to make a competitive offer when other buyers are bringing all cash.
Control what you can, plan for what you can’t
At the end of the day, we can’t control the market; what we do control are our own investments. We also control our spending and saving, which is just as important, if not more critical, to our long-term financial goals. We have some control over our earnings, employment, and taxes through strong planning. Ultimately, we need to focus on the things that we can control, have a plan, and have trusted advisors to help with the things that we can’t.
These are our key market insights: buy companies and avoid the headlines, stay the course, know your goals, and diversify, diversify, diversify. When in doubt, consult with your trusted advisor to avoid acting on emotion. Please don’t hesitate to reach out with any questions, or to schedule a consultation to discuss your financial planning. The earlier you start planning and working towards financial freedom, the better.