US equities poised for elevated volatility in 2022

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Wall Street had a rosy year in 2021 with all the three major indexes scoring double-digit returns, but many analysts have warned of a bumpy path for equities in the year ahead amid multiple challenges.

The S&P 500 jumped 26.9% in 2021, marking the benchmark's third straight positive year, powered by energy, finance, and large-cap tech stocks. The Dow and Nasdaq advanced 18.7% and 21.4%, respectively, also notching their three-year winning streaks.

U.S. equities are unlikely to repeat these kinds of gains in the new year and investors should be mindful of increased volatility as a more hawkish Fed, high and persistent inflation and COVID-19 uncertainty are among the factors complicating the outlooks, according to a number of analysts.

"We expect 2022 to be another positive year for risk assets, but investors should be prepared for lower returns than the past few years and more volatility than the past 20 months," head of Asset Allocation Americas at UBS Global Wealth Management Jason Draho said earlier this week in a note.

Credit Suisse Group projected its 2022 S&P 500 price target at 5,200, up from the 5,000 seen previously, representing a 9.1% increase from the closing price on Dec. 31. That's one of the most bullish forecasts. The updated outlook was partly based on expectations for "robust" economic growth.

Goldman Sachs expected the U.S. stock benchmark would end 2022 at 5,100, while JPMorgan analysts predicted that the S&P 500 would rise this year to 5,050.

Meanwhile, many others stroke a more cautious or even bearish tone.

The Bank of America's analysts projected that the benchmark would finish 2022 at 4,600, lower than its current level.

"We expect the S&P 500 to be range-bound and volatile, and bond returns to be negative net of inflation," said Lisa Shalett, chief investment officer at Morgan Stanley Wealth Management.

Morgan Stanley analysts saw a base-case forecast of 4,400 for the S&P 500 at the end of 2022 even with an expected gain in earnings, representing a 7.7% dip from the closing price on Dec. 31.

"I feel 2022 will be a tough year for the broad market with Nasdaq underperforming all indexes. I believe all indexes will be negative for the year," Larry Benedict, CEO & founder of The Opportunistic Trader, a U.S. market research firm, told Xinhua in a recent interview.

"Headlines will be dominated by inflation issues coupled with raising rates," he said.

A big piece of the economic story in 2021 was hot inflation and experts noted that high inflation is expected to persist at least for some time this year before moderating.

The U.S. consumer price index rose 6.8% in the 12-month period ending in November 2021, the fastest annual pace in almost 40 years, according to the U.S. Labor Department.

In a bid to tackle soaring inflation, the Federal Reserve is on track to end its asset purchase program by March while projecting three interest rate hikes in 2022, as it exits from the ultra-loose monetary policy enacted at the start of the pandemic.

It is possible, perhaps even likely, that price pressures do not abate until the second half of 2022, which may leave the Fed no choice but to move up their forecast for interest rate, said analysts at Zacks Investment Management.

Market jitters are likely as investors come to grapple with an inflection point in monetary policy. Some investors worry that interest rate-sensitive growth and tech stocks would be particularly vulnerable if the Fed aggressively tightens its monetary policy through rate hikes.

Also adding shadow to the market is COVID-19 uncertainty. While it is still too early to tell how severe the Omicron variant will impact the U.S. and the global economy, the rapid spread of the highly contagious strain in the United States has already caused consumers to pull back and some employees to skip work, either to avoid getting infected or to avoid spreading to others.

There have also been increasing reports of shows being canceled, classes shifting online, offices reversing reopening plans and airlines cancelling flights.

"Economic data is likely to get worse before it gets better. Omicron's negative effects on growth are not yet evident in the data, but soon will be," said Draho.

Corporate earnings are another focus on Wall Street. U.S. corporations have posted record earnings in the last two quarters even without the help of the leisure, hospitality, and travel industries. It remains to be seen whether corporations can continue to deliver impressive results.

"Investors will need to be nimble in response to the evolving economic environment ... If nothing else, 2022 will be another interesting year," Draho said. 

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