Covid. War. Inflation. Fears of recession. The stock market can’t keep up

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Covid. War. Inflation. Fears of recession. The stock market can’t keep up

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The combination of these major macroeconomic and geopolitical problems will make it difficult for equities to break out of the hole and end 2022 in positive territory, some experts say.

“There are too many headwinds to expect good returns for equities this year,” said David Spika, president and chief investment officer of GuideStone Capital Management.

Despite the big Wall Street rallies of the past couple of days, the stock market collapsed overall in 2022. The Dow is down nearly 7% this year, the S&P 500 is down about 10% and the Nasdaq is down. by more than 15%.
Before that, investors were already worried about inflation and the likelihood of the Federal Reserve raising interest rates several times this year to fight it. Meanwhile, Covid-19 has not gone away, with the recent spike in cases in China raising alarm bells.

“I don’t see any way to get positive returns for the shares,” Spika said, adding that it would be a win if the shares “only” drop to single digits this year.

Uncertainty continues to weigh on investor sentiment

Spika said it is unreasonable to expect the Russia-Ukraine crisis to end soon. And even if it were, Spika argues that stock valuations are too high as interest rates are about to rise.

“Double-digit percentage reductions are possible. The last few years have been strong and this has been fueled by accommodative monetary policy,” he said. “That tailwind is about to turn into a huge headwind.”

Stephanie Lang, Homrich Berg’s chief investment officer, agreed that “the era of easy money is over”.

While the Fed’s higher interest rates are high in the minds of investors, it’s only part of the problem for the stock market.

When will people get tired of high prices?

“The list of stock tensions is quite long. We have war, the reminder that the pandemic is endemic, and significant and long-lasting disruptions to supply chains,” said Vincent Reinhart, chief economist at Dreyfus and Mellon. “Investors are understandably squatting.”

Reinhart added that the Fed is likely to raise rates several times this year to try and curb inflation. But there are fears that the central bank has waited too long to raise rates and may now face a problem of stagflation, the combination of slow growth and high prices.

“It will be difficult for the Fed to do it right,” Reinhart said. “Any reasonable person would say that the recession risks are higher today than they were six months ago.”

Lang thinks the central bank “missed the mark on inflation” and will have to make more aggressive moves in the future.

The Fed is in a tough spot, but some hope it won’t raise rates too abruptly

Other experts aren’t so sure big moves are on the way. They say the Fed recognizes that there is a risk of overdoing rate hikes and that small, gradual hikes may not slow the economy too drastically. This could mean that the worst could soon end for the stocks.

“If the Fed trumps rate hikes, that would be a long-term problem for the economy,” said Louise Goudy Willmering, partner at Crewe Advisors. “But if the Fed isn’t too aggressive, we can still have growth. The economy doesn’t have to fall off the precipice.”

Willmering also said it is too early to give up hopes of a market rebound by the end of the year. It’s only March, after all.

Of course, it may be difficult for equities to organize for a huge rally like the one following “the fear-induced decline of 2020,” he said. But she added that if concerns about Ukraine and supply chain problems ultimately subsidize, earnings growth could return to more normal levels, which would boost inventories.

Biden's plan to reshape the Fed has just hit a headache

Even if the market in general continues to struggle, there may be pockets of strength.

Lang said investors should look to quality safe haven stocks that pay dividends, such as consumer goods companies and healthcare companies. And Spika said energy stocks and smaller companies with greater exposure to the US economy than international markets should also do well in an environment of rising rates.

However, even with stocks rebounding like the last few days, there may be more volatility in sight, which could create better opportunities for investors.

“When do you start buying?” Spika said. “Once we have clarity on what is happening in Ukraine”.

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