Weekly Preview: Preparing For The Market's Next Move In 2022

"The years ahead will occasionally deliver major market declines -- even panics -- that will affect virtually all stocks. No one can tell you when these traumas will occur.”

The above quote came from Warren Buffet, who in an annual letter to shareholders, reminded investors that market volatility is not only par for the course, it also presents great buying opportunities. More importantly, the Berkshire Hathaway (BRK-A) (BRK-B) CEO wanted to underscore the unpredictable nature of the stock market and the folly in thinking that anyone knows what’s going to happen at any particular point in time. In fact, in looking back on the state of the market in 2021, its unpredictable nature is one thing (if not the only thing) that was predictable.

For example, as the lives of millions of people across the world was ravaged by the coronavirus pandemic, the stock market in the U.S. thrived, driven by work-from-home, surging e-commerce demand and digital adoption across many industries. The Dow Jones Industrial Average hit a record high of $36,338.30. The S&P 500 index, which closed at record highs 68 times in 2021, ended at an all-time high of $4,766.18, while the tech-heavy Nasdaq Composite Index also finished 2021 in near record territory at $15,644.97.

In 2021 some of the biggest stocks such as Apple (AAPL) got even bigger, coming within an eyelash of the $3 trillion market cap. Meanwhile, Tesla (TSLA) drive into the trillion dollar market cap club, joining Apple, Amazon (AMZN), Microsoft (MSFT) and Google (GOOG , GOOGL). Tesla's surge catapulted CEO Elon Musk into the world’s richest person. But as the “K-shaped recovery” grew the fortunes of the wealthy, that was not the case across all income levels in the U.S. and other countries. The Federal Reserve and its ultra-accommodative monetary policies, including keeping interest rates near zero, were a major factor in the market’s rally.

Will that be the case in 2022?

As an investor, there are plenty of factors to be aware of heading into the new year. For starters, the COVID-19 pandemic has to still be front and center on the minds of investors. Aside from the business disruptions it caused, there was also an incredible strain on healthcare, education, and travel and leisure. What’s more, the pandemic has been a major cause of product shortages and supply chain disruptions. This has driven up the price of not only shipping of goods, but also global product demand and a shortage of truck drivers.

In addition to these issues, the COVID-19 pandemic has lead to many other factors causing businesses to struggle and fail to meet consumer demand and investor expectations. Many companies have cited a challenging labor environment, including higher labor costs which has not only pressured their margins, but also created operating inefficiencies. For that matter, an estimated 70% of S&P 500 companies that reported earnings by mid-October warned investors that their revenue and profits would be lower due to supply chain issues.

Some companies such as FedEx (FDX) have taken aggressive steps to address the labor shortage, producing slightly better results than others. Despite the increased cost of shipping, companies such as Amazon continue to take steps to ensure that they don’t pass on the higher costs to their customers. The fear is, among other things, doing so may impact their earnings and stock performance. The question is whether these efforts will yield meaningful improvements in their bottom lines in 2022.

These type of events have been a key factor to the rising inflation we have witnessed. Rising inflation, which refers to a general increase in prices across an economy, has been one of the main concerns investors have had in 2021. The metric reached 6.8% based on the November consumer-price index — a level not seen since the early 1980s. There are many reasons for rising inflation, but the result is always the same: the value of each dollar you have declines and there are fewer things the dollar can buy.

With the consumer being the main driver of the economy over the past few years, persisting inflationary pressures into 2022 will force investors to assess stock prices and whether companies that rely on consumer spending can continue to thrive. If higher prices of goods and services will impact consumer spending, stocks will suffer. The question is, to what degree? That said, there are tons of reasons to remain invested in the market.

Economists are somewhat bullish on the new year, guiding for global economic growth between 4.5% and 5%. In the near term, the upcoming Q4 earnings, along with various economic data — many of which are expected to be solid — should give investors and strategists the confidence they desperately crave. Earnings of S&P 500 companies are expected to rise by double-digit percentage points. What’s more, January has been historically volatile on the positive side. For different factors, including tax selling and bonus money deployment, not only do stocks tend to rise in January, it’s been that way over the long haul, according to data from Standard & Poor’s.

So, as we are about to dive into 2022, I expect a basket of stocks, particularly those with strong top- and bottom-line growth projections that have suffered losses in 2021, to present strong buying opportunities in January and throughout the rest of this year. When factoring these macroeconomic trends and others, I believe 2022 will be a stock picker's market. Technology stocks, particularly growth areas of the market that tend to fare better in a lower interest-rate environment, will continue to outperform.

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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Stocks Earnings Economy Coronavirus Central Banks Smart Investing