2022 - Predictions

I usually start these emails with how the markets did this week.  Generally, I stick to the Dow Jones Industrial Average because this is the index that most people grew up with and is most widely reported.  Over the course of an ordinary week, the indices tend to move in tandem plus or minus a few tenths of a percent.  So far, this year has been a little different.  When compiling the numbers this week, I noticed the DJIA was down 0.27%, the S&P 500 was down 2.27%, and the Nasdaq was down 5.27%.  This is a reversal of the fourth quarter, and more specifically the month of December, that saw valuations stretch to new highs in areas like technology and energy.  I expect we’ll see this trend continue as valuations revert to the mean and markets normalize for the coming year.

Now on to the fun stuff. Last week I took us on a stroll down memory lane. The events of 2021 were memorable and worth revisiting. This week I’d like to look forward. Byron Wien is the 89-year-old Vice Chairman of Blackstone Advisory Partners (note: not Blackrock), and is not shy about making predictions. Each year he comes out with ten potential surprises for the markets. While I do not agree with all his predictions, they are worth considering. I’ll rate what I see as the probability of each of the ten occurring.

1. The combination of strong earnings clashes with rising interest rates, resulting in the S&P 500 making no progress in 2022. [25% - not likely.  I don’t think we’ll repeat 2020 or 2021, but I expect equity returns will come back down to a more normal range of 7% this year.]
2. While the prices of some commodities decline, wages and rents continue to rise and inflation grows by 4.5% for the year. [90% - very likely]
3. The bond market begins to respond to rising inflation and Fed tapering, and the yield on the 10-yr Treasury rises to 2.75%. [40% - not likely.  It will undoubtedly rise but probably around or slightly above 2% for the year.]
4. In spite of the Omicron variant, group meetings and convention gatherings return to pre-pandemic levels. Normal conditions are largely restored in the U.S. [90% - very likely]
5. Chinese policymakers respond to recent turmoil in the country’s property market by curbing speculative investment in housing. As a result, a major asset management industry begins to flourish in China. [50% - the jury is out on this one.]
6. The price of gold rallies by 20% to a new record high. U.S. investors seek the perceived safety and inflation hedge of gold amidst rising prices and volatility. [50% - depends on how aggressive the Federal Reserve is combating inflation.]
7. Oil producing countries can’t increase production enough to meet demand.  The price of oil confounds forward curves and analysts’ forecasts when it rises above $100 per barrel. [80% - demand continues to grow while capital expenditures on fossil fuels continues to decline.]
8. Suddenly, the nuclear alternative for power generation enters the equation. The viability of nuclear power is widely acknowledged. [70% - while there will be pushback, this is on the horizon.]
9. ESG evolves beyond corporate policy statements. Government agencies develop and enforce new regulatory standards that require companies to document progress on various metrics deemed critical. [25% - I think this is coming eventually, but probably not in 2022.]
10. The U.S. finds it cannot buy enough lithium batteries to power the electric vehicles planned for production. China controls the lithium market, as well as the markets for cobalt and nickel, and opts to reserve most of the supply for domestic use. [75% - lithium could be a real bottleneck as EV cars take off.]

In closing, I’d just like to take this opportunity to say thank you to those that read my weekly recap. I know there are some weeks you may disagree with what I say. And I understand the opinions and viewpoints cross the spectrum amongst all our clients and friends. But I hope there are substantially more weeks that you read this piece and come away with a bit of insight, feel I’ve helped make sense of what can be a complex subject, and perhaps even brought a smile your face. Together, we’re going to make 2022 a great year.

Bruce J. Mason, MBA