Market. Valuations spiked during the pandemic, supported by those low interest rates, and are likely to adjust down somewhat as rates rise. That said, any decrease in valuations will be offset by rising earnings. Companies have improved their operations and margins during the pandemic, learning lessons about remote operations and cutting costs. Those benefits will persist as the economy reopens. Higher margins will combine with rising sales, as we have seen, to push earnings up fast enough to more than offset the falling valuation levels. As we approach the new normal, those improvements will slow—but that won’t happen in 2022.
The Arc Of Recovery
As we look at the arc of the pandemic and recovery, 2020 marked the nadir, 2021 was the first half of the recovery to normal, and 2022 will be the second (and final) half of that recovery. The new normal at the end of 2022 will mean that the economy and markets will no longer be dancing to the tune of the virus. Instead, they will once again respond to fundamental economic and financial factors. It will not be the same as the old normal, but it will be determined by the same factors. That will be something to celebrate.
In short, 2022 will be a year of growth. The economic problems are real: inflation, labor shortages, rising interest rates, political dysfunction, and more. But this scenario is normal, and those problems will be accommodated. Even the medical problems, while likely to continue, are also part of the new normal. What we saw in 2021 was that the economy could accommodate the Delta waves and still grow. The Omicron variant, and others likely to surface, can and will be controlled. In the interim, they are unlikely to derail the return to normal.
The Upside Of 2022
As we closed out 2021, there were real risks to contend with. But that is always the case. Now, we understand those risks better and have made significant progress in controlling them. The opportunities for 2022 are also real—and even more likely to come to pass. With all the focus on the downside, 2022 presents significant upside possibilities. That, too, is something to celebrate.
Brad McMillan is chief investment officer for Commonwealth Financial Network.