The economy and markets in 2021 were fueled by significant government spending and loose monetary policy yielding strong economic growth and stock market gains.
U.S. stock markets were up 14-27%, depending upon the index one favors. The S&P 500 Index was the clear winner, being up 27%. The S&P 500 Index top five holdings are: Apple Inc “AAPL”, Microsoft Corp “MSFT”, Amazon.com Inc. “AMZN”, Tesla Inc. “TSLA”, and Alphabet Inc. “GOOGL”. These five stocks represent 23% of the 500-stock index.
The 1.9 trillion American Rescue Plan Act of 2021 and the Federal Reserve’s “FED” $120 billion per month bond buying program fueled the extraordinary economic growth and stock market returns.
We expect government spending will be constrained in 2022 as compared to 2021. The FED has already reduced its bond buying program. This should come to an end by May 2022. Economic growth should slow in 2022 with GDP of approximately 4%, and still greater than the U.S. economy’s long term 2.5% annual trend.
Inflation is the most significant economic issue facing our economy in 2022 in our opinion.
Money supply (M2) expanded by an astounding 40% since the beginning of the pandemic. As supply was constrained due to businesses shutting down periodically across the globe and extraordinary government spending both contributed to the current 6.0% inflation, well greater than the FED’s 2.0% target. The FED has the great challenge of curtailing inflation by slowing down the economy, while keeping employment and the economy expanding. We expect interest rates to rise in 2022 as the FED become more restrictive with monetary policy.
The stock market will likely experience heightened volatility in 2022 with periodic declines of 10% or more (3,600 Dow Jones Index points).
This potential volatility is precisely why we recommend that clients maintain sufficient cash and short-term bonds “safety funds” to fund three years of spending needs. Timing the market by jumping out of the market and then back in is a futile strategy.
Richard S. Lawrence, CFA / January 6, 2022SCHEDULE A CONSULTATION
We recommend only to invest in the stock market with a long-term view (3+ years) and have cash available for emergencies and spending needs for the short term (1-3 years).
PLAN FOR THE LONG TERM
PREPARE FOR SHORT TERM STOCK MARKET DECLINES!