Volatility on the horizon Volatility on the horizon http://www.federatedinvestors.com/static/images/fhi/fed-hermes-logo-amp.png http://www.federatedinvestors.com/daf\images\insights\article\yellow-coaster-small.jpg January 3 2022 December 16 2021

Volatility on the horizon

Three things to watch in 2022.

Published December 16 2021
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The S&P 500 has rallied by 25% in 2021—marked by 67 record closes and a 53% year-over-year increase in corporate profits. But in 2022, we expect a muted gain of only about 10% for S&P earnings to $230 and stock prices to 5,300, with higher volatility. We see three developments that could drive that.

Fed course correction as inflation rages Core PCE hit a 31-year annualized high of 4.1% in October. In November, core PPI leapt a record high 6.9% and core CPI rose to a 30-year high of 4.9%. The Federal Reserve responded yesterday by doubling its monthly tapering schedule to a pace that would complete it in March 2022. We expect three quarter-point rate hikes to follow in 2022, the first of which could be in May, and four more in 2023. How stocks will respond depends partly on how President Biden fills the three open seats on the Fed’s board. Will the new, presumably more dovish Fed follow through on these policy changes?

Uncertainty of Covid’s omicron variant While the delta variant remains the overwhelming source of new Covid cases in the U.S., omicron is on track to cause more than one million infections in the U.K. by the end of December. Observing the trajectory and economic impact of omicron there over the next several months may prove insightful. Pfizer and Moderna are confident they can produce a reformulated vaccine booster to combat omicron by next March.

Build Back Better (BBB) on life support The Congressional Budget Office has said that when stripped of sunsetting gimmicks, Biden’s supposedly $1.75 trillion reconciliation bill really prices out at $5 trillion, paid for with much higher federal debt and taxes. Given the surge in inflation, that much additional spending is like pouring kerosene on a bonfire. Moderate Democratic senators, such as Joe Manchin (W. Va.) and Kristen Sinema (Ariz.), are demanding that the bill be shrunk and better targeted to support those with the greatest needs. As other moderate congressional Democrats look ahead to the midterm elections and consider their own career survival, we could see BBB scaled down considerably, if it passes at all. We believe that equities would respond favorably to either, leading to a rise in stocks then and another year-end rally after the elections.

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Tags 2022 Outlook . Markets/Economy . Equity .
DISCLOSURES

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Consumer Price Index (CPI): A measure of inflation at the retail level.

The Personal Consumption Expenditure Index: A measure of consumer inflation at the retail level that takes into account changes in consumption patterns due to price changes.

Producer Price Index (PPI): A measure of inflation at the wholesale level.

S&P 500 Index: An unmanaged capitalization-weighted index of 500 stocks designated to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. Indexes are unmanaged and investments cannot be made in an index.

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