I was recently on a call with American Funds/Capital Group, they had some insightful information in their 2022 Outlook Edition and I wanted to share some of this information with you.
Here is a summary of what they are predicting: “Expect Strong BUT Slowing economic growth in 2022.”
U.S. And European Economies
Capital Group is anticipating that the U.S. growth should range from 2.5 – 3% and some European economies may grow faster in the range of 4-5%. However, emerging COVID variants, declining stimulus, and inflation may make growth slower at various points during the year.
Inflation will persist, sorry
They are anticipating that Inflation will remain elevated through late 2022. “Eventually consumer prices will return to more of a normal range.” But this will take longer than anticipated. Some ways to combat inflation is to invest in “Treasury Inflation Protected Securities, Dividend paying Stocks, and companies with pricing power.”
Remember inflation is not ALL bad, though it feels bad in our wallets. Inflation allows for companies to raise prices and increase profitability. Generally, during periods of high inflation, historically speaking, both stocks and bonds have shown strong returns. Finally, periods of elevated inflation are rare, we only have to look at the 1970s.
Volatility and the Mid Term Election
Political uncertainty typically has a “short term effect on the markets.” In a review of nearly 90 years of equity returns “stocks tend to have lower average returns and higher volatility for the first several months after the midterm election.” Elections always generate a lot of noise in the media so, try and remember to focus on your investment goals and objectives.
Dividends are the new trend
Many companies suspended dividends during the pandemic but are returning to paying their dividends. There is a focus at Capital Group to “find companies with strong underlying earnings that have a commitment to paying higher dividends over time. “
What’s the trend for Bonds?
The Federal Reserve has indicated that they will likely hike the federal funds rate. If we look at the Bloomberg US Aggregate Index (which is a broad-based fixed income index used by bond traders, mutual funds, and ETFs as a benchmark to measure relative performance), “in the last seven periods of hiking the federal funds rate there was only a decline in the bond market two times and on average the index returned 4%.” Keep in mind that bond managers work to identify and add bonds into their portfolios that can stand up in these types of environments and also to invest in Treasury Inflation-Protected Securities to counteract rising prices.
Investment Themes to consider…
- Pricing Power equities and companies with rising dividends can help fight inflation.
- The digital revolution has expanded globally and internationally, leading to opportunities to invest in companies across Asia and Europe as they adopt these new technologies.
I hope you find this information insightful. Keep in mind that we invest for the long term and build, manage and review your portfolio on a regular basis in order to stay diversified and ahead of these potential impacts on the market. We try to remain proactive rather than re-active, but as always if you have questions or would like to review your portfolio in detail please do not hesitate to contact me.