As the 2022 Winter Olympics are about to commence, athletes from around the world are set to go for the gold! However, since there can only be a few medal winners, many will feel the heartbreak of defeat or loss. Something similar can be also said for some investors in today’s volatile market.
Since the pandemic hit, and particularly early in 2022, we have been facing uncertainty in the market. Over the last 2 years, after early crushing losses, our economy had sped it's way to the fastest recovery in history. But not unlike some of the modern Winter Olympic events, we know that speed isn’t always the most important thing to consider. Sometimes, ensuring execution in the face of environmental factors is just as critical as speed. As we grapple with volatile market conditions, the market’s execution will be the star of the show. Performance under pressure for all key players, including the Federal Reserve, company CEOs, etc., may be the key to winning market performance.
If you’re a Winter Olympics fan or not, we found there are some interesting similarities between what’s happening in our economy and the upcoming Winter Olympic events. So, let's take a look and see if both are able to go for the gold!
Yields Will Swerve Between the Gates
As downhill skiers are weaving through the gates, they can reach some very high speeds. Even though they are gaining speed they keep pushing harder, because they know there are safety nets to catch them if the fall. The 10-year Treasury yield has not reached its previous peak rate, and this cycle won’t be any different. Government debt, demographics, and globalization trends are factors that could keep the 10-year Treasury swerving up and down within a tight range, which ended the year at about 1.9%. If the Fed removes emergency support, or its "Safety Net" it is sure to make it challenging for fixed income returns. However, bonds will still play a significant role for investors who may need to outrun equity risk. Corporate credit markets may also have opportunity as volatility is likely, default rates are low, and corporate earnings are improving.
The Federal Reserve Has to Navigate the Fast-Moving Economy
Have you ever watched bobsledding? The global economy is eager to reopen similar to a bobsled bolting down the track. Just as the sled picks up speed, increasing demand is causing inflation to rise, which is leading the Fed to their next step in the race, tightening monetary policy. A bobsledding team has a brakeman to slow them down when going too fast. This is also the Federal Reserve’s job – to try and slow down inflation. However, they have been taking a less aggressive approach hoping the economy will absorb the bumps in the track. In 2022, it is possible that economic growth will decrease enough to stall inflationary pressures, which allow the Fed to have some flexibility.
Equities’ Transition from Strength and Momentum to Targeted Precision
Biathlon athletes need to do two things to be successful – ski fast and shoot straight. These are two very different talents. The equity market was a pro at the speed portion of the race as it boosted equity valuations and reached new records in earnings growth. Currently, the market is in a position where it needs precision and sturdiness. Making sure that you’re investing in the right market sectors and the right companies continues to be important. Cyclical sectors should be considered as their earnings may be on-target and have above-trend economic growth in the coming year.
Sector Exposure May Steer Small Caps in the Right Direction
Did you know Luge athletes are the fastest out of all the Winter Games? Not only do they have the most speed, but they also incur the most risk because their sleds don’t have breaks. Small-cap equities are similar to luge athletes because they have fast earnings growth but higher volatility than large-cap equities. Small-cap returns did not fall flat, but they also did not do their best last year. However, we expect small-cap equities to potentially offer investors some edge this year with the increase in services spending and economic growth expectations. Many believe the preferred cyclical areas of the economy this year may be industrials, financials, and energy.
Oil Prices Will Find their Footing
Oil prices have been spinning, like a figure skater, in all directions with COVID, pipeline stoppages, inventory releases, and different natural disasters. Hopefully, supply and demand will help oil prices find their balance and avoid a fall. The oil market is still dealing with fellow OPEC judges who are likely to continue to support oil prices. Because of this, we don’t expect oil prices to change substantially. The effect these prices have on the growing renewable energy space is also yet to be seen.
Looking Forward for Opportunities
It’s easy to compare what is currently happening in the economy to the Winter Olympic games. Both include the thrill of victory, and/or the agony of defeat! However, looking towards to what 2022 will bring is hard to predict. 2021 brought healthy commodity gains, historically low interest rates, the start to the equity bull market, and the second smallest intra-year pullback since 2000. All of this has many investors anxious to see what happens this year.
2022 may bring news of COVID variants, Fed tightening, mid-term elections, and geopolitics. All which will add more or less tension to the markets. Regardless, there are always opportunities when it comes to your portfolio. This year, active management and refinement may be important considerations to avoid a year of stagnant performance.
All successful athletes must train, stay disciplined, and have a game plan or strategy if they want to stand on the top of the podium! We also as investors must prepare for to win and have long-term success. How do we do this? Be prepared, have a an investment strategy based on your financial plan, and work with trained professionals to help you set up your game plan for success.
Lawrence V. Adam, III, 2021, “Carrying the Torch”
Daniel S. Miller, Kaleb Robuck, and Marcus Taylor are investment adviser representatives of, and securities and advisory services are offered through, USA Financial Securities Corp. (Member FINRA/SIPC). USA Financial Securities is a registered investment adviser located at 6020 E Fulton St., Ada, MI 49301. Miller Financial Group is not affiliated with USA Financial Securities.