When I was a kid, I did not like surprises. So, just about any new experience was a minefield of anxiety and distrust. I lived in Los Angeles when I was in 2nd grade, and my class took a trip to Disneyland. While most kids rode every ride they could, I was the one on the benches with a teacher any time I deemed a ride questionably scary (which was most of them). If someone couldn’t tell me exactly what I was going to experience – I was out.
Obviously, the irony of my choice of career is not lost on me.
2022 is no different than any other year that we have faced in that its events are mostly unknowable. Since the future is always full of surprises, it is our expectations (glass half full/empty) that set us up for either disappointment or contentment. But since it is my task to help navigate us financially through this year, I want to share some of my expectations for what is ahead.
There has been much talk about inflation this year. We see its effects at the pump, the grocery store, in used and new car prices, and just about everything else we need or want. But we have also started to see some high prices of 2021 come back down – lumber, steel and even home prices appear to be softening. Overall, I still believe inflation will trend back down towards 4% in the second half of the year. This will likely be accomplished by slowly-resolving supply chain issues globally.
I think we can expect more market volatility in 2022 than we had for most of 2021. 2021 was for the most part a pretty smooth climb. The bumps we had in November and December were more historically normal than the first half of the year, and I expect the volatility to continue. We have not had a correction of 10% or more in the S&P since March of 2020. As a reminder – it is normal to have a 10+% correction about every 18 months. This is part of the investor experience and should be addressed with investment allocations that match your risk budget rather than market timing activities.
The return of volatility does not mean that we should expect a bad year. In fact, I agree with LPL Research in looking for decent gains in 2022 (Outlook 2022 link). Even with all the known headwinds, we see a strong consumer and businesses looking to rebuild inventories. That being said, I also believe returns for the next few years will likely be more muted than the last three.
As you may have noticed, our government has been spending a lot of money. The infrastructure bill has become law and the Build Back Better program, while currently stalled, is not completely off the table. No matter what happens or who is in charge in the coming 18 months, I do expect taxes to go up for both corporations and individuals.
Globally, there is a lot of noise. And while our tension with Russia and China are not new – and it is still in everyone’s interest to not escalate tensions into chaos – these are the areas that I am particularly watching for disruption.
Every year has its surprises – both bad and good. We appreciate the trust you put in us to help you navigate that unknown terrain. Please take some time to look at the year ahead and make a plan to move forward on the things you Value First. You might just be surprised at what can be accomplished!