2022 Outlook from TIAA's Investment Management Group: Key themes impacting portfolios

2021 – Another volatile year

We entered 2021 with a great deal of optimism as the markets and economy rallied on the news of the COVID-19 vaccine rollout and a steady decrease in cases, hospitalizations, and deaths throughout the spring. That trajectory stalled in the summer months as the surge of the highly contagious Delta variant of COVID-19 collided with a significant drop-off in vaccine adoption rates, and as the year ended, the Omicron variant roiled markets. These factors slowed the economic recovery setting the stage for a rise in inflation due to increased consumer demand and supply chain hurdles.
 

The Outlook for 2022

As we start the new year, much of the U.S. economy has reopened and both corporate earnings growth and U.S. economic growth should normalize after booming in 2021. Gross domestic product (GDP) and earnings growth likely peaked in the third quarter of 2021, pushing expectations for equity market returns to be flat or down in 2022. The big risks as 2021 ends are continuing supply chain issues and labor shortages impacting the economy. If companies can't source raw materials, that can adversely impact sales and profit margins. As a result, investors can expect to see pressure on cyclical stocks, like airlines and industrials - those that usually do well when the economy is doing well, as the logistical problems play out.
 

Ongoing concerns

One of the biggest concerns for the equities market in 2022 is the pace of inflation. Namely, whether it turns out to be transitory, as the Federal Reserve (the Fed) believes, or more permanent. Once inflation becomes entrenched, it can be hard to reverse, especially where rising wages are concerned, since higher labor costs are generally reflected in higher costs for goods and services. A second concern is the Chinese debt situation since China is a major driver for emerging markets. To the extent the Chinese economy is slowing down, overall emerging markets performance will be challenged since China represents such a large portion of emerging market economies.
 
Inflation will also be a key influencer of the fixed income markets in 2022. If it becomes more permanent—and we continue to see higher wages, supply disruptions, and labor shortages—we would expect to see a rise in interest rates, which can have a negative impact on bond values.  The Fed has also begun the process of tapering, which involves reducing its investments in assets such as U.S. Treasury securities, signaling that the economy is on a more stable footing. Historically, Fed tapering has been a precursor to an increase in interest rates, which could come as early as mid-2022.
 

Three themes inform the new year

As in 2021, TIAA’s Investment Management Group (IMG) believes three transformational themes that will continue to influence personal, business, planning, and investment decisions for investors in 2022. These themes will have a direct impact on the equity, fixed income, and municipal bond markets.
 
IMG’s themes include:
  1. The Great COVID Evolution - the evolution to a post-pandemic world
  2. Lower for Longer - an extended period of low interest rates
  3. Volatility is the Next Normal - continued market volatility
 
Below, IMG looks at how these themes and other factors are impacting the financial markets, economy, and your planning as we enter 2022.

Equity market

Expect slower earnings growth heading into the new year
Read More

Taxable fixed income

Credit fundamentals are as solid as they've been in decades
Read More

Tax-exempt bonds

Security selection will be a key driver for sourcing relative value
Read More
Schedule time to meet with your TIAA advisor to learn about ways to optimize your planning and remain on course toward your important financial goals.  Your advisor can help you review your lifetime income options within the context of your overall financial plan and develop a strategy that works best for you.

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