2022 Investment Outlook

2021-12-31, Michael Thompson

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In this article, we summarize a variety of investment forecasts for 2022. We've included stocks, bonds, gold and Bitcoin. Here's a short list of takeaways.

• Most view equities as the best investment, but are doubtful returns will be anywhere near 2021 levels.
• Experts are split on US vs. ex-US stocks, with a slight overall preference for ex-US.
• There was a consensus that bonds will continue to struggle, with most expecting near 0% real returns.
• As usual, Bitcoin price predictions are all over the map, from $10,000 to $400,000.
• There is a consensus that gold will have little or no nominal return in 2022. Most expect it to end the year below $1,800 per ounce.

Before proceeding, we want to point out that investment forecasts are far from perfect. For example, 2021 was another tough year for "expert" investors. Morningstar reported that less than 15% outperformed the S&P 500 as of the end of November. Even accurate prediction of economics or business fundamentals can be thwarted when often irrational retail investors and fuzzy ESG scores control price action. One random Reddit post can spin a negative return to a triple digit gain or vice versa.

US Stocks

From the sources we surveyed, the average expected return was approximately 6.5% (nominal, excluding dividends).

US stocks have performed very well for a long period of time. Most experts expect earnings growth to continue in 2022, but not as much as 2021. Most foresee economic growth around 3.6-4%. Compared to 2021, all agreed that 2022 will be less lucrative for US stock investors. A minority of experts predict little or no returns from domestic stock in 2022, citing some combination of high valuations, inflation, increased interest rates and tighter monetary policy.

A number of sources expect outperformance from smaller-cap and value stocks, but some sources disagree and expect the large-cap growth stocks to continue to outperform. Baron’s annual pick of 10 promising stocks for the new year had a value tilt, including: Amazon, AT&T, Berkshire Hathaway, GM, Hertz Global Holdings, IBM, J&J, Nordstrom, Royal Dutch Shell and Visa.

It may not pay, however, to bet on rationality in the stock market. The often emotional and unpredictable retail traders are moving stock prices substantially. A random post on Reddit can make the difference between a loss and a triple digit return, independent of business fundamentals. In 2021, retail trading volume exceeded mutual funds, quantitative hedge funds and banks! If PFOF is outlawed in 2022, retail trading volumes may reduce.

Another trend decoupling stock price from business monetary performance is ESG investing. ESG funds have seen substantial inflows in recent years, and much more so in 2021. This trend props up prices of companies therein at the expense of sometimes profitable, “dirty" companies. Of course, ESG scores are subjective and evidence shows that some companies “bend the truth" to obtain high scores.

Below are predictions of nominal US stock returns in 2022 (excluding dividends) from various organizations.

Global, ex-US Stocks

Stocks outside the US have underperformed the US for 4 years. The chart below shows an ex-US index, VEU, compared to the US (VTI). The good news for international investors is that much of this underperformance can be attributed to stretched valuations in the US—stock prices further exceeding business fundamentals. Given some amount of “reversion to the mean," many expect ex-US equities to outperform in the coming years.

In their 2022 outlook, Morgan Stanley recommended underweighting US stocks. They expect ex-US equities to play catch-up and have less volatility.

Many experts cite high valuations, supply issues, policy uncertainty and potential tax hikes as reasons to underweight US equity in 2022. Some specifically point out Japan and Europe as better investments for 2022.

The table below summarizes predictions from various organizations. Absolute predictions were hard to find, many of these are relative predictions.

Bitcoin

Bitcoin is up over 70% in 2021, with the total crypto market exceeding 2T USD in value. If monetary policy tightens, as is currently expected, some experts predict capital will shift away from speculative assets like Bitcoin. They also believe regulation, especially from the US, could be a key issue for crypto in 2022. SEC chair Gary Gensler assured the Senate in 2021 that they are working overtime on new rules for crypto markets.

There’s a reasonable chance that a spot Bitcoin ETF may be approved in 2022, which could boost sentiment and price. There are also a host of companies either accepting crypto or investigating doing so, including AMC, Amazon and Walmart. The latter 2 are hiring crypto experts, reportedly to form a digital currency strategy.

Barring stringent regulation changes, many younger professionals will continue to invest a portion of their paycheck in crypto, including Bitcoin. There may or may not be substantial institutional investment in 2022. Many institutions may wait for clarity on upcoming US regulation.

Some exchanges report that Bitcoin is at a record high leverage ratio. This means investors have high confidence in Bitcoin, but also means that an otherwise small downturn could force liquidations, resulting in a major price drop.

It’s hard to forecast price action, and (much,) much more so for Bitcoin. The track record from so-called experts is dismal, full of predictions with over 100% error, and biased on the high side. For readers that want to hear the predictions anyway, we provided a list below. Please realize, however, that such predictions haven’t been much better than picking a number at random. (Many of the November/December interim predictions made by the following people/organization have already substantially missed the mark.)

Bonds

We didn’t find a single expert that was overweight in bonds at the time of this writing. All predicted poor overall bond performance with little or negative real returns in 2022. In their 2022 market outlook, Vanguard predicted an overall nominal return of 1.9% per year for US bonds over the coming decade—just below their predicted 2% annual inflation. They expect investment-grade bonds to outperform treasuries by about 0.5%.

Charles Schwab titled their 2022 fixed income outlook “Rough waters" referring to the waves of optimism and pessimism in this market. They expect Treasury yields to rise to 1.75% to 2% in 2022 on relatively quick economic growth. Of course, such predictions depend on how the Fed reacts to inflation and job growth.

Despite these anemic yields, our belief is that bonds should not be forgotten. They can still play a role in stabilizing and protecting your wealth. Unexpected events like COVID-19 can cause sudden and dramatic falls in stock prices. Bonds protect us from this and arm us with an opportunity to “buy the dip" and increase our equity footprint, as we did in early 2020.

A specific bond investment generating interest now is the Series I bond. It’s paying a 7.12% interest rate, but that will be adjusted every May and November based on inflation. The rate is guaranteed not to go negative and would actually increase if inflation is unexpectedly high in the coming months. There are some limitations to be aware of, so please read more if you’re interested.

Gold

At the time of this writing, gold trades for about 1,814 USD/ounce, well below it’s $1,898 price at the start of the year. Recent gains in gold price have come on very low volumes, and it’s hard to find a convincing reason for gold to appreciate in 2022.

Many, like Sugandha Sachdeva (vice-president of commodity and currency research, Religare Broking Ltd.), believe that monetary tightening could reduce gold prices in 2022. They believe shrinking liquidity will shift capital away from speculative assets like gold. If bond rates rise, they will become relatively more attractive than gold. Rising inflation failed to boost gold prices in 2021 as some insiders had promised.

To make matters worse, some speculators that had bought gold in the past have turned to cryptocurrencies. A continuation of this trend could further pressure gold prices.

On the flip side, some say the poor performance of gold in 2021 leaves room for catch-up in 2022. They are hoping for a “reversion to the mean" type of phenomena.

We’ve included a table of predictions of gold price in 2022 below. Notably, none of the sources were optimistic about making money in gold in 2022.

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