12 Charts Present 2022’s Inventory Market Headwinds

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The inventory markets have had one other very robust 12 months with the Dow 30 Industrials, S&P 500 and Nasdaq up 18.7%, 26.9% and 21.4%, respectively. Over the previous three years the S&P 500 has virtually doubled by growing 90% with beneficial properties of 29%, 16% and 27% from 2019 to 2021. Over the identical timeframe the Dow is up 56% and the Nasdaq has risen essentially the most at 137%.

The Dow had the smallest rise of the three main Indexes in 2021. It hit its all-time closing excessive final Wednesday at 36,489 and intra-day excessive on Thursday at 36,679.

The S&P 500 notched 70 record highs during the year with a closing excessive level of 4,793 this previous Wednesday and an intra-day excessive of 4,809 only a day in the past.

The Nasdaq’s all-time closing excessive was on November 19 at 16,057 with an intra-day excessive of 16,212 on November 22. Whereas the S&P 500 and Dow closed lower than 1% off their closing highs by 0.6% and 0.4%, respectively, the Nasdaq was off by 2.6%.

Whereas there are a selection of things that would preserve the bull market operating and overcome what’s a perennial wall of fear, there are quite a few headwinds that would preserve the markets from shifting greater. Some may have a bigger affect, such because the Federal Reserve’s tightening, whereas others would in all probability be much less, reminiscent of Congress going after huge tech corporations. Under are lots of the main components that would put a damper in the marketplace’s efficiency in 2022.

GDP development, unemployment and inflation to sluggish whereas rates of interest rise

To supply a fast overview of the economic system this can be a chart from the Federal Reserve’s December financial projections. What it reveals is that the economic system will nonetheless develop however at a slower fee with the unemployment fee and inflation lowering whereas the Fed funds fee will begin to creep up. Observe that whereas there’s a pretty sharp drop in GDP development predicted by the Fed, it’s not shocking that it settles in round a extra long-term 2% fee.

Federal Reserve slowing then ending its bond purchases and lift rates of interest

There’s a inventory market adage of, “Don’t struggle the Fed” which implies if the Fed is pumping cash into the market by shopping for bonds or decreasing rates of interest, the fairness markets will rise. Nonetheless, if the Fed tightens by growing rates of interest that’s dangerous for shares. Since late 2008 when the Nice Recession hit, the Fed has grown its stability sheet from below $1 trillion to virtually $9 trillion. This has been an unprecedented transfer that has helped to gas shares. It’s actually unknown how a lot an impression ending its bond purchases and elevating charges in 2022 can have on the markets.

Rates of interest have been on a downward trajectory since 1981 when the Fed raised them to struggle inflation. This has helped the inventory market as buyers have opted for shares over bonds. Whereas buyers aren’t anticipating any massive fee hikes in 2022 or 2023, if the Fed or the market deems that they need to rise sooner than anticipated it will be damaging for shares.

Inflation stays at the next stage for longer than anticipated

Whereas inflation has bubbled as much as charges not seen since March 1982, a very good portion of the rise is because of Covid-19 mucking up provide chains in varied methods. Whereas the speed of inflation is predicted to say no resulting from provide chains getting higher and year-to-year comparisons being “simpler”, there’s a threat that inflation stays at the next stage longer than anticipated.

Even when the extra unstable meals and power prices are eliminated, the 5.0% fee reported final month has not been seen because the center of 1991.

Observe that U.S. Treasury Collection I bonds are paying a 7.12% annualized fee for six months. Whereas the speed will in all probability lower in Might, there are a number of advantages to buying them outlined in this article.

Earnings led the way in which in 2021 however slower development in 2022

S&P 500 earnings are on observe to extend 46.3% this 12 months per John Butters at FactSet, however the higher comparability is the 26.0% enhance from the pre-pandemic 12 months 2019. Earnings development allowed the markets to hit new highs even because the Index’s P/E a number of contracted a bit.

Earnings development is predicted to sluggish to eight.7% to 223.48 for the S&P 500 in 2022. Buyers have a tendency to love accelerating development, so slower development might be a headwind subsequent 12 months.

Valuation multiples lower

The S&P 500 was capable of smash report after report in 2021, even with the market’s earnings a number of declining, as earnings development greater than made up for the marginally decrease valuation. It isn’t shocking to see the Index’s P/E a number of decline for the 12 months because the Fed lastly introduced it will sluggish its bond purchases and signaled elevating rates of interest subsequent 12 months.

If P/E multiples may keep the identical in 2022 the market growing 9% can be thought-about very strong, particularly after such a powerful efficiency this 12 months. Nonetheless, the largest threat to the market’s equation of earnings occasions the P/E ratio to offer a price for the Index is the present 21x a number of falling.

Job development may sluggish

After the economic system misplaced 9.5 million jobs in 2020 it got here roaring again with over 6.1 million created within the first 11 months in 2021. The unemployment fee has dropped from a excessive of 14.8% in April 2020 (and it was in all probability greater resulting from information gathering limitations) to six.7% in December 2020 to 4.2% as of November 2021.

Whereas the speed may drop additional, the beneficial properties will probably be smaller as there are fewer individuals searching for a job. The labor power participation fee has rebounded from 2020’s depths, however is about 1.5 share factors beneath the place it was pre-pandemic.

One cause that the participation fee in all probability gained’t rebound to pre-pandemic ranges is the variety of “Extra Retirements” which might be believed to have occurred as a result of pandemic. Economists at the Federal Reserve Bank of St. Louis published an analysis that reveals there are probably 2.4 million individuals who retired sooner than deliberate. If that’s the case there will probably be fewer individuals to rejoin the workforce and obtain wages that might be spent.

Extra financial savings have been spent

Over the previous 18 months the Federal authorities has supplied trillions of {dollars} to individuals in Covid reduction. This allowed tens of millions of individuals to remain afloat with cash for lease, meals and different necessities. There have been additionally tens of millions of people that have been capable of save this cash as could be seen within the chart beneath.

There was rather a lot written about how this extra financial savings would move again into the economic system and from the seems to be of it the financial savings has just about been spent. Since there isn’t something of this magnitude being queued up by the Federal authorities this additional increase to spending gained’t be there in 2022 or past.

Tom Lee factors out just a few extra dangers

Tom Lee is the Head of Analysis and co-founder of Fundstrat International Advisors. On a shopper name final week he included a slide that features quite a lot of the above headwinds and has just a few extra reminiscent of navy conflicts in Taiwan (can be very impactful to the markets and particularly expertise shares) and Ukraine (not good however in all probability doesn’t have the identical impression).

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