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Posted by Craig Basinger on Jan 20th, 2022

Top 4 Market Predictions for 2022

Happy New Year, everyone! After years like the last two, it’s hard to forecast what may happen one week from today, never mind what will happen one year from today—but there are a handful of key trends we believe will act as market catalysts for the year ahead.

Here are our top four market predictions for 2022.

1. Stimulus removal will begin and trigger a market correction
2. CPI will drop but longer-term inflation will tick higher, lifting yields
3. The TSX will outperform the S&P 500
4. FAANG stocks will lag the market

Market Predictions from Purpose’s Chief Market Strategist, Craig Basinger

1.  Stimulus removal will begin and trigger a market correction

The first part of this prediction is maybe an easy call—that stimulus removal will begin and there will be a pivot from quantitative easing. Some governments around the world have already started tapering and we expect that to continue. Beyond that, we expect these measures to trigger a market correction as the year progresses.

Central bank balance sheets and S&P 500 chart

Government stimulus helped our economies navigate through the ever-ongoing pandemic, but it’s also lifted equity prices and asset prices across the board. As indicated in the chart above, as central banks expand their balance sheets and inject more liquidity into the financial system, a good portion lands in the equity markets, lifting equity prices higher.

So as governments begin to taper and with overnight interest rates poised to move higher, what will that mean for the equity markets? Since equity growth has been fueled by stimulus, we think stimulus removal might trigger a corrective environment.

For more of our insights on a potential market correction, interest rates, and global tightening cycles in the year ahead, watch from 2:05 to 4:00 in Craig’s prediction video above.

2.  CPI will drop but longer-term inflation will tick higher, lifting yields

As prices have been running the hottest they’ve been since the early 90s in the U.S. and Canada, everyone has been talking about the consumer price index (CPI) and inflation. However, CPI is just the headline number with year-over-year changes, and although certainly important, it doesn’t indicate what is much more important: whether inflation will be transitory or long term. Our expectation this year is that as supply bottlenecks are alleviated and demand spikes normalize, CPI will drop down, which should help the overall sentiment surrounding inflation.

However, what’s actually more important to look at is longer-term inflation, which is represented by the green line in the chart below. This green line is essentially the inflation baked into the bond market, bond prices, stock prices, and even the price of your home. With all the concern around inflation, you’ll notice that line hasn’t moved too much but has increased a little bit. If that starts to change, all those prices will start to change. Our prediction surrounding longer-term inflation is that it will tick a little bit higher, but CPI’s drop will be the big news story. Our bonus prediction is that we think when putting this all together, bond yield will lift higher this year.

Longer term inflation break evens after the next year remain muted

Market Predictions from Purpose’s Chief Investment Officer, Greg Taylor

3.  The Toronto Stock Exchange will outperform the S&P 500

It doesn’t happen very often—in fact, it’s happened only once in the last ten years in 2017—but we think this will be the year the TSX outperforms the S&P. What’s driving this prediction? Sector weights. We believe sector weights will be critical to the TSX’s performance this year. As we look toward a period of global growth and higher interest rates, it seems like the tech sector will be under the most stress. What we could see is a rotation toward cyclical stocks—which is really what drives the TSX at the end of the day, as this exchange has a heavy weighting in financials, materials, and energy stocks. As we start to see a tilt toward those sectors, we expect this to play in the favour of the TSX. This could be the year it acts as a global leader for capital markets.

4.  FAANG stocks will lag the market

This could be the year to get out of mega-cap stocks. This also plays into the theme that as interest rates go higher, we could see a rotation out of tech and into the cyclicals. FAANG stocks (Facebook, Apple, Amazon, Netflix and Google) and other mega-cap stocks are historically strong performers with great balance sheets, but the risk is that all the good news is priced in and they’re over owned. There are too many people who have exposure to this sector through passive indices or even active funds. As investors start rotating to cyclicals for better performance, it could cause a flow out of the FAANG stocks, which could be bad for a lot of indices. We predict for better portfolio performance this could be time to look away from FAANG stocks and into cyclicals.

Thanks for reading! We plan to revisit these predictions later in the year to recap on what’s happening and see how our predictions fared.

— Craig Basinger, Chief Market Strategist, and Greg Taylor, Chief Investment Officer, at Purpose Investments

The content of this document including the video is for informational purposes only, and is not being provided in the context of an offering of any securities described herein, nor is it a recommendation or solicitation to buy, hold or sell any security. The information is not investment advice, nor is it tailored to the needs or circumstances of any investor. Information contained in this document is believed to be accurate and reliable, however, we cannot guarantee that it is complete or current at all times. The information provided is subject to change without notice.

Commissions, trailing commissions, management fees and expenses all may be associated with investment funds. Please read the prospectus before investing. If the securities are purchased or sold on a stock exchange, you may pay more or receive less than the current net asset value. Investment funds are not guaranteed, their values change frequently and past performance may not be repeated. Certain statements in this document are forward-looking. Forward-looking statements (“FLS”) are statements that are predictive in nature, depend on or refer to future events or conditions, or that include words such as “may,” “will,” “should,” “could,” “expect,” “anticipate,” intend,” “plan,” “believe,” “estimate” or other similar expressions. Statements that look forward in time or include anything other than historical information are subject to risks and uncertainties, and actual results, actions or events could differ materially from those set forth in the FLS. FLS are not guarantees of future performance and are by their nature based on numerous assumptions. Although the FLS contained in this document are based upon what Purpose Investments and the portfolio manager believe to be reasonable assumptions, Purpose Investments and the portfolio manager cannot assure that actual results will be consistent with these FLS. The reader and the viewer is cautioned to consider the FLS carefully and not to place undue reliance on the FLS. Unless required by applicable law, it is not undertaken, and specifically disclaimed, that there is any intention or obligation to update or revise FLS, whether as a result of new information, future events or otherwise.

Craig Basinger, CFA

Craig Basinger is the Chief Market Strategist at Purpose Investments. With over 25 years of investment experience, Craig combines an educational foundation in economics & psychology with years of experience in both fundamental and quantitative research. A long-term student of the markets, Craig’s thoughts and insights can be seen in his Market Ethos publications and through his regular contributions on BNN.

Craig and his team bring a transparent and cost-efficient approach to investment management. The team provides asset allocation OCIO services and directly manages over $1 billion in assets. The team manages dividend mandates, quantitative risk reduction strategies and asset allocation services.

Greg Taylor, CFA

Greg Taylor is the Chief Investment Officer of Purpose Investments. A data-driven manager with a focus on managing risk through active-trading strategies, Greg specializes in finding and exploiting pockets of volatility in the market to drive returns. He spent more than 15 years managing pension and mutual fund assets at Aurion Capital Management. He also held a role of senior portfolio manager at Front Street Capital and LOGiQ Asset Management before coming to Purpose Investments.

Greg serves on the investment committee for the MS Society of Canada and advises the finance program’s portfolio management course at Bishop’s University. He has won numerous Brendan Wood International “TopGun” awards and is a regular host and guest on BNN Bloomberg and Toronto’s all-news radio station, 680News. Greg is a CFA Charterholder and has a BBA in Finance from Bishop’s University.