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Think back to a year ago. Everybody was ready for a booming economic recovery and a summer of love in 2021, all made possible by Covid-19 vaccines. Some were even saying the end of the pandemic was in sight.

Then the Delta and Omicron variants arrived. As 2021 draws to a close, the pandemic continues unabated, generating one mixed signal after another and greatly complicating the global economic recovery.

In the stock market, however, the party lasted all year long. The total return on the S&P 500 in 2021 was more than 27%—not even dramatic inflation data was able to dampen the animal spirits. Not yet, anyway.

But observers are wondering how much longer the bull market can last—barely interrupted as it was by the shortest bear market ever in early 2020. There are signs that last call could be around the corner—tempered by other indications that investors still have money to make in 2022.
Here are the top nine investing trends to watch out for in the new year.

1. Markets Are Still Being Driven by the Covid-19 Pandemic

Which way will the pandemic winds blow? There’s hope that 2022 is the year when normalcy returns, sending travel, commercial real estate and traditional retail stocks even higher—but then again, we’ve heard that story before.

Delta dashed the dream in 2021. And as the calendar turns, Omicron’s emergence offers both short-term and long-term worries. Even if this variant doesn’t produce another surge of deadly infections, what about the next variant? Mother Nature, not humans, gets to write the end of this story.

Principally, investors should realize that the post-Covid market rally is already here, even if the pandemic isn’t over yet. That’s because stock markets have likely already priced in most or all of the gains that can be expected from a fully reopened economy.

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While there are still mask mandates and airline travel remains below pre-pandemic levels, many Americans have already returned to a relatively normal life, so even if luck turns and the pandemic finally peters out sometime in 2022, there might not be much more room for the economy—or the stock market—to run.

2. Federal Reserve Rate Hikes Are Likely in 2022

Stocks do well when the Federal Reserve keeps interest rates low, but the days of the Fed’s zero interest rate policy (ZIPR) are numbered. The only question investors should be asking themselves is how many Fed interest rate hikes will happen in 2022.

The CME’s FedWatch Tool predicts at least two rate increases, based on how traders are speculating in the futures market. Meanwhile, the already planned reductions in the Fed’s monthly bond purchases—the so-called taper—means that quantitative easing (QE) will be over by spring.

QE and rock-bottom rate have helped to prop up stocks since early 2020. But more bad news, like even hotter inflation reports, might force the Fed to tighten monetary policy even faster, and that’ll probably end badly for stocks.

3. Tired of Hearing about Inflation? It’ll Get Worse Before It Gets Better

It’s undeniable: U.S. consumers (and financial media) are fixated on inflation. Casual dismissals of high gas prices and supply-chain-related shortages as “transitory” won’t work in 2022. The course of inflation is going to be an even bigger story in 2022, and if the current trends aren’t reversed soon, there’s going to be market turmoil.

Higher interest rates and higher inflation are a recipe for a Wall Street retreat. It might, however, signal opportunities in the bond market or even provide some good news for savers in the form of higher APYs.

4. Supply Chain Solutions

Check out any U.S. port today and you’ll see piles and piles of shipping containers waiting to be unloaded or to be refilled with goods. This is just one tipoff that the supply chain challenge no longer looks like a short-term issue.

There might be some good to come from supply chain issues over the long term. Americans are for the first time in a long time questioning the wisdom and national security implications of buying and making nearly all our products overseas. That’s good.

But in the short-term, it’s probably bad for markets. Even if the pandemic mercifully ends, there will be no full-term recovery until supply chains smooth out and keep store shelves full. And the Omicron variant isn’t making resolution of this issue any easier, guaranteeing that it will stick around in 2022.

5. Recovery, I Hardly Knew Ye

The raging gross domestic product (GDP) growth of 2021 has been frequently underplayed in the media. In the first half of 2021, the U.S. economy was cooking along with 6% quarter-over-quarter GDP increases. That’s unsustainable—and we found that out in the third quarter, when growth fell to 2%.

That was an early indication that the re-opening dividend might have come and gone. A fourth-quarter recovery is expected, but imagine if 2022 settles in with low levels of GDP growth right as the Fed gets really scared about inflation. This could be a perilous combination for stockholders.

6. The Job Market Is Still Unsettled

The marked improvement in the job market was a major story in 2021. By November, U.S. unemployment had fallen to 4.2%, and—as you’d expect—the tight market has helped push wages higher.

The numbers present an incomplete picture of the real labor market, however. The U.S. still hasn’t regained the 22 million jobs it lost during the pandemic recession, and it’s millions of jobs short of where its pre-pandemic trajectory should have taken the job market.

So why is unemployment so low? Much of the gap can be chalked up to women forced out of the labor market while trying to navigate child care, plus their overrepresentation in industries hit hardest during the pandemic.

The ferocious competition for workers has hurt companies with higher labor costs and staffing challenges. These issues need to be worked out before the labor market can return to normal—and until then, it will remain another drag on many public companies.

7. Have the FANNG Stocks Lost their Bite?

If you want a real sign that the stock market could be in for a slowdown in 2022, look to the FAANG stocks.

This is a Wall Street nickname for the five tech giants that have been a driving force behind the bull market for years now, including Meta—formerly Facebook (FB), Amazon (AMZN), Apple (AAPL), Netflix (NFLX) and Alphabet—parent of Google (GOOGL). Microsoft (MSFT) is sometimes substituted for Netflix, making the acronym FAAMG.

Last year, we predicted a rotation out of FAANG, because the tech giants had run so far so fast during 2020. We turned out to be only partially correct. Microsoft and Google gained even more in 2021 (our bad), while more modest 2021 gains at Facebook and Amazon actually underperformed the wider market.

In fact, according to Morningstar’s U.S. Large-Mid Index, in 2020 the FAANG stocks contributed approximately 25% of the total market’s returns. This year through late November, the FAANG stocks contributed barely 3% of the market’s returns.

So the FAANG stocks were not a bad bet in 2021, but they came real close. Some analysts say it’s inevitable that investors will go looking elsewhere for returns in 2022, further benefiting names like Tesla (TSLA). Could we suggest boring consumer staples with dividend-enhanced returns as a place to find comfort while inflation creates uncertainty?

8. Where Are the Chips?

The ongoing computer chip shortage will continue to impact stocks—and not just tech stocks. Practically all consumer durable goods have a computer chip in them now, so the shortage is a bigger problem than laptops. Detroit parking lots are overflowing with almost-completed cars right now, just waiting for scarce computer chips that still need to be installed.

Even an early end to the pandemic wouldn’t necessarily end this dimension of the supply chain crack-up. Here’s just one example: So-called DSP chips, which convert analog to digital signals, necessary for audio equipment ranging from podcast mixers to TVs to cell phones, are in short supply. Blame a terrible fire at a Chinese plant in late 2020 that complicated pandemic problems.

Intel says the chip shortage will last into 2023. That might be a good reason to consider buying chipmaking stocks—but it also might be a better reason to fret over the stability of most other consumer discretionary names.

9. Midterm Elections

Perhaps the biggest uncertainty of 2022 are the midterm Congressional elections. Republicans are likely to do well, as the sitting president’s party usually loses seats in the midterms. Still, the fight seems poised to be hyperpartisan, which might lead to unpredictable news, instability or even violence. That’s the kind of surprise that can spook investors.

It’s also not new. The run-up to midterms often roil stocks, particularly when a power shift in Washington is anticipated. An analysis by Green Bush Financial of stock returns in 1994, 2006, and 2010—the last three times Congressional bodies switched parties—provides a clear warning.

“In all three of those years where a shift in power was in the cards, the stock market was either down or flat leading up the midterm elections in November,” the analysis found. All is not lost, however. All three years, the market churned higher after the election.

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