2022: The Big Picture for the Stock Market

“Predictably unpredictable.”

That’s 2021 in a nutshell.

The last month was a real doozy. We’ve had a suddenly resurgent pandemic, a major Federal Reserve pivot and stocks swinging in all directions.

Many of those same variables will stay in play for the stock market as we head into 2022. Ted put together a terrific list of what to watch for here.

So, for my 2022 predictions, I pondered a few big-picture challenges and opportunities that lay ahead.

Let’s get the obstacles out of the way first…

The Challenges

The Other Taper

Ever since Fed Chairman Jerome Powell dropped “transitory” to describe inflation, investors are fixated on the path of monetary policy.

But little has been said about headwinds from government spending that will hit the economy in 2022.

Trillions in stimulus money has already been unleashed to combat the economic impact of the pandemic. But that money isn’t coming back next year, which means fiscal spending will pull back.

And it’s not just a challenge facing the U.S. economy.

Similar headwinds to growth are unfolding across the world, as you can see in the chart below:

projected fiscal spending world economies 2022

Source: Bloomberg

(Click here to view larger image.)

Takeaway for 2022: Get ready for a fiscal drag. There will be little appetite in Congress to pass any further stimulus measures. That could be a big risk for the economy if new COVID variants slow activity.

Follow the Curve

I’m a huge fan of using signals from the fixed income market to inform views about stocks and the economy.

And the yield curve is one metric I will follow closely next year. That’s because it has a terrific track record at forecasting recessions when it becomes inverted or when longer-term yields fall below short-term interest rates.

Now, with the Federal Reserve expected to hike those short-term rates at least three times in 2022, the prospect for an inverted yield curve becomes a very real possibility.

This next chart shows the curve for the two- and 10-year Treasury yield. It’s already flattened considerably as traders react to the Fed’s hawkish pivot:

two- and 10-year Treasury yield

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Takeaway for 2022: The yield curve is already reflecting a slower growth outlook into next year. Further flattening (or worse, inverting) would spell trouble for the stock market, where a strong economy and earnings growth is needed to justify valuations.

The Opportunities

Looking Abroad

It’s no secret that U.S. and China relations have been on the rocks for some time now. Trade tariffs remain in place, U.S. listings of Chinese equities are being called into question and the battle for tech supremacy rages on.

With no thaw in relations on the horizon, other Southeast Asian countries should benefit as manufacturing and supply chains are reshuffled. Vietnam in particular looks primed to capitalize in the wake of recent free trade agreements.

VNM ETF 2021

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Takeaway for 2022: The chart above shows the VanEck Vietnam ETF (BATS: VNM). It has bucked the trend of weakness in many other emerging market equities this year and is currently setting new 52-week highs. Based on the catalysts outlined above, I anticipate the strong momentum to carry into 2022.

The Shiny Stuff

This time last year, I wrote about how conditions in 2021 would favor metals of all types. My recommendation for industrial metals has worked out well, but my precious metals play has pulled back this year.

Part of the issue is that demand for certain metals took a hit from supply chain disruptions, particularly in the auto sector.

However, I still favor the long-term catalysts in place, particularly for gold.

The impact of inflation and incredibly low real interest rates are huge tailwinds for the yellow metal. And based on the 15-year chart below, I think it’s geared up for a big run in 2022.

gold projection 2022

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Takeaway for 2022: Gold has been consolidating over a major breakout from the $1,800 level. It’s a bullish chart pattern that points to a renewed uptrend in 2022.