What do you think of roller coasters? We may be in for one in 2022, with the markets showing higher volatility – and perhaps a lower net gain – than last year. Headwinds include rising inflation, the Fed’s likely actions to tighten monetary policy in response, and increased labor costs. Tailwinds may include that same Fed action, as it carries potential to blunt a ‘stagflationary’ period, and a likely political shift waiting in the fall.
Writing from Wells Fargo, senior equity strategist Christopher Harvey is expecting that the market will experience a correction, that is, a drop of 10%, by mid-year: “Pullbacks will likely be more frequent in this choppier equity market. Ultimately, the bend-but-not-break market mentality finally fails investors in 2022 in our view.”
Harvey’s view includes several causative factors, which he lists clearly, writing, “Labor costs accelerate as retirements accelerate and white-collar workers capitalize on the relatively low friction associated with working from home for another employer… Earnings continue to move higher, but multiples do not. A combination of decelerating growth, hawkish Fed, peak pricing, and a belief that longer term US growth has not improved drives multiple compression and frustrates bulls.”
At the same time, Harvey points out that the mid-term elections – which usually favor the party out of power – are setting up to be a smash-up for the Democrats and writes, “The GOP will gain control of Congress, adding perhaps two Senate seats and 25-30 House seats… This sets up a late-year rally as SPX history has favored Republican Senate control…”
For investors, the prospect of an uncertain and volatile market climate gives a clear impetus toward defensive positions, and that will naturally get them looking to dividend stocks. These are the classic plays to protect the portfolio from market pullbacks and volatility, and for good reason. A reliable dividend provides a steady income stream no matter where the market goes.
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