The general outlook for equities is positive toward the end of the year and into 2022. Stocks performed relatively well through the autumn earnings season and, as a general rule, the fourth quarter tends to be the best one for stock performance. While the coronavirus, labor shortages, supply chain issues and rising prices have presented headwinds for the economy, low interest rates and positive corporate earnings have kept equity performance in good shape.¹

According to Charles Schwab, investors looking for a higher stock allocation should consider high-quality, reasonably valued companies poised to benefit from worldwide economic recovery. As for individual stock picks, she emphasized company fundamentals and the ability to weather different market conditions over specific sectors.²

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Merrill Lynch believes the market environment looks to be supportive of stock investments through the first two quarters of 2022. Its analysts expect job growth to continue and believe the United States will head toward full employment, which will help eliminate the current issues related to labor and supply shortages. Merrill Lynch also sees China’s recovery as a catalyst to spur overall global economic growth. For investors, the wealth manager recommends adding long term investment themes related to innovation. Diversification remains important but key sectors expected to thrive include industrials, materials, energy, financials and large-cap technology.³

Now that factories are back up and running worldwide, Goldman Sachs sees inventories building back up, continued innovations in health care and a boost in consumer spending due to pent-up demand. By the middle of next year, the wealth manager sees a moderate slowdown in the current growth rate of developing markets. It predicts global GDP will increase to about 4½% and does not expect the Fed to begin raising interest rates until July 2022.⁴

Speaking of the Fed, in November it announced plans to begin tapering bond purchases over the next six months. By the middle of 2022, it anticipates no need to ease monetary policy any further. In response to these actions, Morgan Stanley analysts believe that real economic growth will continue to improve in the New Year. Both America’s response to COVID and the new infrastructure bill place the United States in a favorable position relative to the rest of the world. Investors will likely have the confidence to buy riskier assets, whereas inflation risk will continue to put upward pressure on real interest rates.⁵

One thing to note about inflation is that it doesn’t necessarily bode negatively for stocks. In fact, according to research by Fidelity Investments, the stock market has performed relatively well during past historically high inflation periods (except for the 1970s). Energy stocks tend to be positively correlated with high inflation, while consumer discretionary and financials are usually negatively correlated with rising prices.⁶

Content prepared by Kara Stefan Communications.

¹ Paulina Likos. U.S. News & World Report. Oct. 29, 2021. “Stock Market Outlook for Q4 2021.” https://money.usnews.com/investing/stock-market-news/articles/stock-market-outlook-for-q4-2021. Accessed Nov. 15, 2021.

² Ibid.

³ Bank of America, Merrill. November 2021. “Here Comes The Pivot.” https://olui2.fs.ml.com/Publish/Content/application/pdf/GWMOL/Viewpoint_November_2021_Merrill.pdf. Accessed Nov. 15, 2021.

⁴ Goldman Sachs. Nov. 8, 2021. “GS Macro Outlook 2022: The Long Road to Higher Rates.” https://www.goldmansachs.com/insights/pages/gs-research/gs-macro-outlook-2022/gs-macro-outlook-2022-the-long-road-to-higher-rates.pdf. Accessed Nov. 15, 2021.

⁵ Matt Hornbach. Morgan Stanley. Nov. 11, 2021. “What the Fed wants, the Fed gets.” https://www.morganstanley.com/ideas/thoughts-on-the-market-rates. Accessed Nov. 15, 2021.

⁶ Jurrien Timmer. Fidelity. Nov. 3, 2021. “Top sectors amid inflation.” https://www.fidelity.com/insights/markets-economy/inflation-sector-returns. Accessed Nov. 15, 2021.

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