Reports and Surveys | March 7, 2022

Investment Outlook: What the Heck Happened to Our Punchbowl?

Whatever fiscal policy has poured into the punchbowl to date is likely to be all the liquid refreshment America gets for the foreseeable future. The U.S. Federal Reserve (the Fed) hasn’t told us how high it’s going to push short-term interest rates or over what period, but it appears that at least three one-quarter-point raises are going to greet the partygoers in 2022. In addition, spiking the punch with a nice dose of buying billions of Treasury securities is also probably ending, perhaps simultaneously, without new fiscal stimulus and rate increases.

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Q1 2022 Investment Outlook Download the Outlook

When less is poured into the punchbowl, the options are simple: someone has to add something or people decide to leave the party. With the Fed raising rates, it is less likely that folks will want to buy fruit punch and spirits.

Yet there are several reasons to think the party may be volatile, but still be a good time:

  • Wages are rising more than they have in a long time.
  • GDP growth is the highest it has been in 40 years.
  • Long-term interest rates have only modestly increased.
  • Consumer and business balance sheets are extremely healthy.
  • The spread of COVID-19 seems to be slowing.

What is our outlook?

Global economies have shown greater ability to manage new waves of the COVID-19 virus and Canada is no exception. Growth for 2022 is projected to be above long-term trends, though slightly lagging 2021. Growth in the first quarter could also be severely impacted by the protesting trucker convoy, which has shut down much of the trade flow between the U.S. and Canada and has worsened the supply chain crisis.

Coping with COVID-19 does have its challenges, as has been proven time and again. Despite falling unemployment, labor shortages continue to be a concern. The overall job vacancy rate is above pre-pandemic levels, and some service sectors are more than double the overall rate. We now see competing forces for consumer capital bolstered by wage growth and government support. Consumer spending has been solid, while appetite for houses remains strong. As reported last quarter, rising mortgage rates may put a dent in the financial condition of many Canadian households. The Bank of Canada has positioned itself to begin rate increases to combat rising inflation concerns.

We see equity returns being modestly below long-term expectations, with the U.S. still slightly outpacing the rest of the world’s total return, but both ending the year in positive territory. We think the next 12 to 18 months will be more volatile.

Famous lyrics — you would cry too if this happened to you! Tears will continue to be shed for most traditional fixed income markets and holders.

Even if longer rates stay relatively flat, fixed income investors will earn a negative real return unless they push well out on the quality curve. Focusing on the intermediate (three- to five-) year lockups seems to be a good option.

For the most part, alternative investments have delivered consistent returns across a broad spectrum of exposures and types. We think that will continue with the inevitable bumps and grinds along the way and a premium on selecting the best available options.

Investing successfully requires discipline, process and a plan. Play the long game, hire great advisors to augment what you do, rebalance and don’t be fooled by pundits or prognosticators.

What does our outlook cover?

The Q1 2022 Investment Outlook includes tables that provide a snapshot of our forward-looking observations on the key macroeconomic factors driving markets and the direction of specific asset classes.

Global macro signals and outlook

We cover these global macro signals for developed markets and emerging markets:

  • GDP growth
  • Inflation
  • Policy rate
  • Currency
  • Equity valuations

Asset class signals and outlook

For 24 asset classes, we select one of five outlook signals based on our 12–18 month perspective relative to our 10+-year CMAs. The signals range from an above-normal return outlook to a below-normal return outlook.

The asset classes include equities, fixed income and these alternatives:

  • Hedge funds
  • Multi-asset class strategies
  • Private equity
  • Real estate
  • Infrastructure
  • Commodities
  • Energy
  • Timber
  • Farmland

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