Over the past year, equity markets indulged on excess GDP growth, corporate profits and monetary stimulus, paving the way for a steady string of record highs and exceptional returns. We believe 2022 is set up for more economic growth, but at a more modest pace.
Download the 2022 outlook: Less is more report using the link below. Or get in touch with a financial advisor to discuss your strategies for 2022 and beyond.
2022 will be a year of moderation, in our view, with the economy and corporate earnings expanding again, but at a more modest pace, while monetary stimulus dials back amid a transition toward higher interest rates. The good news is we think less is more in the year ahead: Fewer extraordinary growth levels and Fed liquidity can still support more bull market gains, accompanied by more volatility along the way.
We see the economy catching a second wind in the latter part of 2022, spurred by healthy consumer financial positions. The personal saving rate averaged 13% over the past year, and labor shortages should support above-average wage growth. Additionally, we expect some supply chain bottlenecks to start clearing in the second half of the year.
Source: FRED.
The above line graph shows the percentage wage growth and personal saving rate in the United States each year from 1996 to 2021. The personal saving rate is calculated as the ratio of personal saving to disposable income. In the United States, wage growth refers to the yearly change in wages and salary disbursements. The chart shows that the personal saving rate hovered between 3% and 12% from 1996 to 2019, before spiking to 34% in 2020. The personal saving rate averaged 13% over the past year. The chart also shows that wages grew more in 2021 than they have year over year since 2008.
Ten-year Treasury yields fluctuated in 2021, ranging from 0.9% to 1.7%. We believe yields will move higher toward 2.0% in 2022 and trade in a higher range overall, likely 1.5% to 2.0%. We see this move driven by continued above-trend economic growth and inflation in the U.S., as well as the Fed beginning its rate-hiking cycle.
Source: FactSet.
The above chart shows the U.S. 10-year Treasury yield and real GDP growth year over year from December 2009 to December 2021. The chart shows that the U.S. 10-year Treasury Yield hovered between 0.5% and 4% from 2009 to 2020, and fluctuated in 2021, ranging from 0.9% to 1.7%. Real GDP growth declined sharply in 2020 before rebounding in 2021. Overall, the 10-year Treasury yields trended with real GDP growth pre-pandemic.
The next phase of the reopening is likely to bring more modest returns and higher volatility, offering opportunities for disciplined investors. We recommend neutral allocations to equities and fixed income, aligned with our strategic (long-term) asset allocation targets of your investment strategy.
We favor economically sensitive international stock asset classes, such as emerging-market stocks and international small- and mid-cap stocks, over large-cap stocks. As interest rates glide higher in the coming months, we believe investors should overweight U.S. investment-grade bonds, which offer higher yields and lower interest rate sensitivity than international bonds.
Our opportunistic (short-term) asset allocation guidance can help you take advantage of opportunities in today’s market without deviating too far from your long-term investment strategy.
Reach out to an Edward Jones financial advisor today if you’d like to discuss your financial strategies in 2022.
The Investment Policy Committee (IPC) defines and upholds Edward Jones investment philosophy, which is grounded in the principles of quality, diversification and a long-term focus.
The IPC meets regularly to talk about the markets, the economy and the current environment, propose new policies and review existing guidance - all with your financial needs at the center.
The IPC members - experts in economics, market strategy, asset allocation and financial solutions - each bring a unique perspective to developing recommendations that can help you achieve your financial goals.