Key themes expected to influence the markets in 2022 are not dissimilar from what we anticipated in 2021, but with a twist. The Great COVID Evolution, unfortunately, will continue to shape our personal and work lives, how we interact with each other, buying habits, where we choose to live and even when we elect to retire—all of which influence monetary and fiscal policy, businesses, the economy and markets. As we approach the end on year two of this evolution, economic data, politics and monetary policy have all combined to generate market volatility. The economy has moved past recession, and as the recovery matures, there is some return to normal in individual daily decisions. But there are lingering effects from pandemic behavior that are now bubbling up to the macro level and having an impact.
“During COVID, we couldn’t go to restaurants or have tea with friends, so we satisfied ourselves by buying stuff. We ordered online, and a lot of those goods came from overseas,” says Canally. A lot of us are still doing that now, he notes. “All that stuff is stuck in the global supply chain and that’s pushing up inflation temporarily.”
Inflation fears, economic and financial volatility, uncertainty about the Federal Reserve’s next move with interest rates and COVID, all contribute to investors’ unease. “Beneath the surface there’s still a lot going on because of COVID that impacts our lives and in turn influences the market,” said Canally.
It’s not surprising investors are concerned. Certainly, there’s plenty that is concerning on the horizon. Canally predicts that supply chain disruptions will continue well into the middle of this year, as well as economic and market volatility. While inflation won’t skyrocket, it is likely to be a bit higher than in the recent past. The U.S. is at a midpoint in both the market and business cycle—meaning our recent period of growth won’t be sustained. “The big gains we got in the early part of the cycle are largely over now,” Canally explains.
Returns on diversified portfolios of stocks and bonds are up by more than average because stocks are up considerably. “Bond yields are lower now, and given how much equity market valuations have gone up, investors should anticipate much lower returns for stocks and bonds, not just in 2022 but the next decade.”
Responding to the change
“More inflation than usual is going to leave some people scrambling for ways to generate income,” Canally says. “Because the ways they used to do it—just buy a bunch of utility or energy stocks, or buy bonds—the yields on those sources have come way down.”
This year, it’s more important than ever to have a plan and to talk to a financial advisor. Retirees, in particular, will have to make decisions about how to generate their income.
Diversifying your investment portfolio, and your sources of retirement income, is a good way to help ensure you meet your retirement goals. “It’s really tough to know any given day, week or month, what investment is going to work. You’re better off owning all of them, large, small and international stocks, treasury, corporate and high yield bonds, each allocated appropriately to your risk appetite. Cover all the bases,” says Canally. TIAA’s managed account clients have such balanced exposure, which provides a measure of protection against uncertainty.
The new year is a good time to re-evaluate your portfolio. “Your assets may have gotten out of whack in the last three years because of big gains, particularly in stocks,” says Canally. It’s also been a wild ride since COVID-19, he notes: “The market fell 34% in February/March of 2020, and stocks are up 112% since then. Bonds are kind of flat. So, your target allocation has probably changed.” Rebalance so you’re aligned with your goals.
The bottom line: “People are going to perhaps experience lower returns and higher inflation, and that’s a combination they’re not used to,” says Canally. “Don’t hit the panic button, make rash decisions or try to time the market. You’re always better off taking a longer-term approach.”