Rewards and risks in 2022

By Anne Kates Smith

Liz Young, head of investment strategy for personal finance firm SoFi, offers insight regarding the stock market this year.

Q: What’s ahead for stocks in 2022?

A: I would say that in 2022, we’re going to be transitioning back to a more normal market. Normal price returns on the S&P 500 are in the 7% to 9% range (slightly higher with dividends reinvested).

The reason I wouldn’t get off-the-charts bullish is that we’re entering an environment in which artificial liquidity is starting to dry up. The Federal Reserve is taking its foot off the pedal slightly. If market expectations are correct, the Fed’s program of tapering its bond purchases, which were put in place to stimulate the economy, will finish around June of 2022. I actually think they may taper a little more quickly than that.

Later in 2022, we could see our first rate hike of this expansion.

Q: How might that play out?

A: We’re expecting long-term rates to gradually grind higher. That means the largest sector in the S&P 500 — technology — will probably face pressure, and the other 10 sectors will have to work extra hard to get us up to a healthy return.

Q: So, would you avoid tech now?

A: That becomes a real time-horizon question. When you look at the next six months, tech stocks might see some pressure as rates rise. But when you think about it from a longer-term perspective, there’s still plenty of opportunity in technology.

There’s a labor shortage across the U.S. Companies will have to invest in technology to stay efficient and to meet demand. So, technology continues to be a necessity as we build a more efficient labor force.

Q: Where do you see opportunities for investors in 2022?

A: If the yield curve steepens and longerterm rates go up, we’d hope it’s happening because the economy is expanding — we’re producing more goods and consumers are spending.

In that environment, you should see some reopening names do well again. Leisure and hospitality stocks should see another nice bounce-back as travel restrictions continue to loosen. We’re thinking about hotels, casinos, airlines — which fall under industrials, but you can think about them as part of the travel industry in general.

Financials continue to be a favorite of mine. I also like small-cap stocks for 2022. They do well in inflationary environments and in economic expansions.

Q: What’s the biggest risk facing the market now?

A: Inflation. That can cause consternation in the market, largely due to the expectation that the Fed will raise rates, and the markets typically don’t like a rate hike. Supply-chain issues have not abated, and neither has demand. That tells me inflation will stay high for a while.

We came into the pandemic with an inflation rate of just over 2%. I would expect it to stay well above that, say 2.5% to 3%. I’d even go as high as 3.5% for a while. It’s a risk because it’s going to hit the consumer pocketbook.

Anne Kates Smith is executive editor at Kiplinger’s Personal Finance magazine.