Top 4 Market Predictions for 2022

Happy New Year, everyone! After years like the last two, it’s hard to forecast what may happen one week from today, never mind what will happen one year from today—but there are a handful of key trends we believe will act as market catalysts for the year ahead.

Here are our top four market predictions for 2022.

Market Predictions from Purpose’s Chief Market Strategist, Craig Basinger

1.  Stimulus removal will begin and trigger a market correction

The first part of this prediction is maybe an easy call—that stimulus removal will begin and there will be a pivot from quantitative easing. Some governments around the world have already started tapering and we expect that to continue. Beyond that, we expect these measures to trigger a market correction as the year progresses.

Government stimulus helped our economies navigate through the ever-ongoing pandemic, but it’s also lifted equity prices and asset prices across the board. As indicated in the chart above, as central banks expand their balance sheets and inject more liquidity into the financial system, a good portion lands in the equity markets, lifting equity prices higher.

So as governments begin to taper and with overnight interest rates poised to move higher, what will that mean for the equity markets? Since equity growth has been fueled by stimulus, we think stimulus removal might trigger a corrective environment.

For more of our insights on a potential market correction, interest rates, and global tightening cycles in the year ahead, watch from 2:05 to 4:00 in Craig’s prediction video above.

2.  CPI will drop but longer-term inflation will tick higher, lifting yields

As prices have been running the hottest they’ve been since the early 90s in the U.S. and Canada, everyone has been talking about the consumer price index (CPI) and inflation. However, CPI is just the headline number with year-over-year changes, and although certainly important, it doesn’t indicate what is much more important: whether inflation will be transitory or long term. Our expectation this year is that as supply bottlenecks are alleviated and demand spikes normalize, CPI will drop down, which should help the overall sentiment surrounding inflation.

However, what’s actually more important to look at is longer-term inflation, which is represented by the green line in the chart below. This green line is essentially the inflation baked into the bond market, bond prices, stock prices, and even the price of your home. With all the concern around inflation, you’ll notice that line hasn’t moved too much but has increased a little bit. If that starts to change, all those prices will start to change. Our prediction surrounding longer-term inflation is that it will tick a little bit higher, but CPI’s drop will be the big news story. Our bonus prediction is that we think when putting this all together, bond yield will lift higher this year.

Market Predictions from Purpose’s Chief Investment Officer, Greg Taylor

3.  The Toronto Stock Exchange will outperform the S&P 500

It doesn’t happen very often—in fact, it’s happened only once in the last ten years in 2017—but we think this will be the year the TSX outperforms the S&P. What’s driving this prediction? Sector weights. We believe sector weights will be critical to the TSX’s performance this year. As we look toward a period of global growth and higher interest rates, it seems like the tech sector will be under the most stress. What we could see is a rotation toward cyclical stocks—which is really what drives the TSX at the end of the day, as this exchange has a heavy weighting in financials, materials, and energy stocks. As we start to see a tilt toward those sectors, we expect this to play in the favour of the TSX. This could be the year it acts as a global leader for capital markets.

4.  FAANG stocks will lag the market

This could be the year to get out of mega-cap stocks. This also plays into the theme that as interest rates go higher, we could see a rotation out of tech and into the cyclicals. FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) and other mega-cap stocks are historically strong performers with great balance sheets, but the risk is that all the good news is priced in and they’re over owned. There are too many people who have exposure to this sector through passive indices or even active funds. As investors start rotating to cyclicals for better performance, it could cause a flow out of the FAANG stocks, which could be bad for a lot of indices. We predict for better portfolio performance this could be time to look away from FAANG stocks and into cyclicals.

Thanks for reading! We plan to revisit these predictions later in the year to recap on what’s happening and see how our predictions fared.

— Craig Basinger, Chief Market Strategist, and Greg Taylor, Chief Investment Officer, at Purpose Investments

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