Monday, December 27, 2021
What’s next on the stock exchange?
In 2022, your shares will ride a roller coaster
By Daniel Saurenz
The past year was as calm as a winter walk in the sunshine on the stock market. It won’t stay that way.
It takes a long time to look for an equity year like the one in the past twelve months. The leading index S&P 500 rose almost on a string, and in Germany there is at least a movement from 13,500 to a good 16,000 points at the top. It is not the performance itself that is crazy, but the fact that it took place over the entire year without any noteworthy corrections.
“The golden rule in 2021 was ‘buy the dip’, that is to say, to buy every price setback, no matter how small. This strategy worked very well and it caught the equity markets in corrections promptly,” says Jürgen Molnar, capital market strategist at the broker RoboMarkets. Nice and good. But the businessman does not give anything for what has been, and in 2022 one can expect more fluctuations, stronger setbacks and more restless days.
It is extremely unusual that neither the Dax nor the S&P 500 and not even the Nasdaq corrected more than around eight percent from the respective top level. The background is obvious. The central banks have blown so much money into the market and they have penalized cash liquidity with negative interest rates that for better or worse the market was accessed.
In the coming year, interest rates in the USA are expected to rise a little, inflation will remain high and the ECB is sticking to its zero interest rate policy. So there is no other escape route than stocks and the only question is how high the return will be. So 2022 will be like 2021. Finished, story told, everything will be fine. It could be that simple. But are there really no risks out there?
Inflation will probably stay with us
It is time to sharpen your senses a little so that the US Federal Reserve in particular will tighten its monetary policy and that this should not happen without strong fluctuations. “The first rate hikes are usually good for stock markets,” says Gil Shapira of broker eToro. Indeed, interest rate moves initially signal a position of strength. But in 2022 the US economy and all other economies are expected to come out of the corona pandemic for good, and this will bring about dislocation. The labor market, consumption, the world of work, supply chains, the range of goods – all of this will change again, and the US Federal Reserve has to be careful to keep the balance in the double transition phase. The end of a pandemic and the transition to a new monetary policy – this harmony will repeatedly spark hopes and worries in the markets. It also means that volatility as well as fear and greed will increase.
“Only if the US Federal Reserve suddenly changes course to combat inflation will the per se positive outlook for stocks change in 2022,” says Stefan Riße, capital market strategist at Acatis Investment, relaxed. However, the investment bank Goldman Sachs recently revised downward expectations for economic growth in the US for the first quarter. Little growth with high inflation is a brain teaser for stockbrokers that isn’t necessarily fun.
In addition, the market rates some stocks as if they were bomb-proof government bonds from Germany or the USA. The word “risks” was not the last to be read at Apple, Microsoft or Google, instead, even with small market corrections, more and more money flowed into the titles. “For some investors, Apple or Microsoft are seen as a substitute for bonds,” says analyst Molnar.
In view of the risks, it is therefore to be assessed positively that after the positive mood escalation at the beginning of November, realism returned to major investors. At least on the short timeline, many investors are secure and the mood around Christmas was defensive, also because of Omikron. This is good because it first of all reduces the height of fall in the markets.
It will be exciting
What sentiment indicators should investors watch out for? In 2021 you could see that the fear barometers VDax and VIX levels of 15 or 16 only briefly touched before the rallies were then ended. On the other hand, every trace of fear in the market was used again for purchases. Psychologically, 2021 was almost exemplary in this regard.
But it was the central banks that increased a lot in 2021, from stocks to crypto to special topics. In the case of Bitcoin or Ethereum, however, you could already see in December that when the stock market was weak, the intrinsically worthless cryptos would be passed down immediately. Bitcoin has no intrinsic value, even if many want to talk about it over and over again. In this respect, the year 2022 and the following will also show how the cryptos run when the very big central bank money – and with it the play money for some – is no longer there.
2022 will also be a year in which companies have to show what they can do. Financing will be a little more expensive due to interest rate hikes, which could cause concern for unprofitable companies. Airbnb, Uber, Tesla and Etsy have been under pressure recently, to name just a few examples.
For the coming year, investors should mentally familiarize themselves with larger fluctuations and always keep legroom. What does that mean? In times that are all too euphoric, you should secure your portfolio and structure it skilfully. When the markets crash, there should be enough liquidity to collect quality. Then 2022 can be a turbulent but very exciting year for the stock market.
Daniel Saurenz operates the stock exchange portal Feingold Research.
This article does not constitute a recommendation to buy or sell individual stocks or other financial products. No liability is assumed for the correctness of the data.