- April 5, 2022
-- Overall, the U.S. and global economy are facing several challenges this year, including higher inflation and central banks that are scrambling to tighten policy while trying to avoid meaningful economic downturn or even recession. While risks to the growth outlook are rising, our base-case view remains that the U.S. economy is not heading into a recession in 2022, particularly given the strength of the consumer and of corporate earnings.
In this backdrop, we continue to see scope for modest gains in markets over the next 12 months. Volatility, however, is likely to remain elevated, and one to three corrections in any given year is the norm. However, investors may use pullbacks as opportunities to rebalance or appropriately diversify portfolios.
- In this environment of elevated inflation, appropriate portfolio diversification can be effective in helping to keeping you on track toward your goals. Cash is likely to have a negative real yield after adjusting for the impacts of inflation, and equities may play a more meaningful role in portfolios, as historically equity returns have outpaced inflation rates over time. In addition, earnings growth tends to move higher as inflation rises, and those companies with pricing power typically benefit more. Within equities, we favor U.S. large caps with a focus on quality.
While value-style and cyclical investments should continue to benefit from the ongoing economic re-opening, we also see opportunities in more defensive sectors of the market as well as large-cap growth and technology stocks, particularly as the pace of economic growth may moderate further next year. Thus, diversification remains critical to navigate the environment in the year ahead.
- Globally, we see opportunities forming to complement domestic positioning with both developed international equities and emerging markets. These markets may rebound behind the U.S., especially if we see meaningful de-escalation in the Russia/Ukraine crisis, pandemic trends globally continue to improve, and China continues to support its economy through fiscal and monetary policy.
- Finally, while bonds have underperformed so far this year as rates have risen, we believe fixed income investments still play a valuable role in portfolios. Bonds have now priced-in an aggressive Fed policy path and potential for economic slowdown, and history indicates that when investment grade bonds underperform to this magnitude, the next 12 months have typically seen better performance. In addition, given our outlook for further equity market volatility, fixed income allocations can help protect portfolios as stock prices fluctuate. Working with your financial advisor to ensure appropriate equity and bond allocations tailored to your financial goals and risk preferences can help you navigate the ups and downs of the market and help keep you on track over time.