With 2021 now in the rearview mirror, it’s time to look forward to new investment opportunities that may unfold in 2022. The effects of 2021 will continue to linger into this year, thanks to the many labor challenges and supply chain disruptions caused by the pandemic. The fact that the pandemic is still with us (and will be for some time) is something that requires an adjustment in our investment approach, if not an entirely new way of thinking.
That said, the pandemic, despite its impact and devastation in many areas of our lives and business, was also a major catalyst for stocks soaring to all-time highs in 2021. Technology stocks, specifically software names, soared because of the pandemic, resulting in breathtaking returns for investors who placed bets in areas such as e-commerce and in companies that enable work from home solutions. For this year, there are some macro themes that will be front and center to consider when making investment decisions.
These themes include rising interest rates, inflation, and other factors such as reopening of the economy. Inflation is likely to have the biggest impact on where stocks end up. A sustained rise in CPI will continue to pressure the companies that can’t pass on those costs to their customers. In terms of interest rates, the Federal Reserve — having already been forced to tighten monetary supply — has signaled multiple rate increases in 2022, with three hikes likely to come this year. While this wouldn’t be a surprise to the market, some stocks are likely to suffer as a result of effect of rising rates, particularly those in the tech sector.
Elsewhere, the market will be on the lookout for higher energy costs. In years past, higher energy prices — which increases the cost of gasoline, for example — have impacted consumers’ ability to spend on discretionary items. As such, it makes sense for investors to position their portfolios in ways that can either capitalize on these trends or feel the least impact.
The “growth versus value” trade was a popular theme in 2021, which persisted as a way for the market to re-assess risk by creating two baskets of stocks. In the value basket, analysts believed those stocks presented an opportunity to buy shares below their actual value. A stock like Intel (INTC) comes to mind; shares fell 8% over the past six months, while rising just 3.3% in 2021, underperforming the 27% rise in the S&P 500 index. While Intel has surpassed the Street’s revenue estimates in eleven straight quarters, investors have grown frustrated about the company’s lack of progress in key business segments.
By contrast, growth stocks often display what is considered above-average revenue and earnings growth potential. Tesla (TSLA) comes to mind. The stock has skyrocketed 55% in the past six months, gaining 50% in 2021, almost doubling the S&P 500 index.
Regardless of where you stand in the “growth versus value” debate, the expected outcome, however, haven’t always panned out. The reality is some stocks will display elements of both growth and value. I will argue that FAANG names such as Meta (FB), Amazon (AMZN) and Apple (AAPL) fit into that category. Will these themes continue into 2022? How high will the markets rise, assuming the markets rise at all? How long can this bull run last?
Investors who have watched their portfolios soar in 2021 are understandably cautious heading into 2022. Nevertheless, while there are tons of potential catalysts to keep stocks higher, particularly those with strong top- and bottom-line growth projections, 2022 will also require a more cautious approach.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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