What to Expect from the Stock Market in 2022 After a Volatile Start

by Katerina Simonetti, CFP, Morgan Stanley Private Wealth Management – May 11, 2022
What to Expect from the Stock Market in 2022 After a Volatile Start

The stock market is off to a volatile start in 2022 after a relatively smooth ride last year. Throughout 2021, the market faced historic and unprecedented economic stimulus both from the Federal Reserve and fiscal efforts. This stimulus added more liquidity to the market and also helped to strengthen consumers’ balance sheets. More liquidity tends to boost stock prices. The broader stock indexes clocked double-digit gains in 2021. 

Enter 2022, and it’s a much different story. It's hard to believe, but the stock market actually hit a record high at the very start of 2022. That didn’t last long. It started to decline meaningfully throughout January and February and the volatility is still here. 

What’s Behind the Declines?

There are a variety of drivers of the stock market’s early 2022 declines. One reason was fear of rising interest rates driven by tighter Federal Reserve policy. Generally speaking, the stock market prefers easier monetary policies from the Federal Reserve.

Another driver was warnings from companies about rising labor costs given the labor shortage. These higher costs started to negatively affect the forecasts that companies were issuing about their business models for 2022.

Inflation was also a contributing factor to this year’s volatility. Over the past few months, we continue to see persistent and elevated inflation data. 

The uncertain market and economic outlook took another downward turn as we moved into late January and throughout February, as geopolitical tensions took center stage with the Russia and Ukraine conflict. Those fears materialized in late February with Russia proceeding with its invasion of Ukraine. It’s a tragic situation in Ukraine. As someone born and raised in Ukraine, I am heartbroken by this conflict and I hope for a peaceful resolution as soon as possible. The stock market hit new lows in February driven by uncertainty from the Russia and Ukraine conflict. It also sparked a significant surge in oil prices, which is adding to our inflationary environment.

Stock market volatility is unsettling, and it creates plenty of fear for investors. This environment is clearly uncertain, but that does not mean that investors should avoid the stock market. 

This is actually an important time for investors to take a closer look at their investment portfolios to understand what they are invested in and how their portfolio is positioned for the many challenges that the global economy faces in 2022. 

It’s wise to keep the following in mind:

  • Geopolitical risks put pressure on all sectors of the market, creating multiple buying opportunities, giving investors a chance to improve the overall quality of their portfolios. Prepare for the long-term and add exposure to certain areas of the stock market during pullbacks.
  • In this uncertain environment, consider defensive stock sectors, including healthcare, real estate, industrials and consumer staples. Be more selective and pay more attention to valuations, earnings projections, competitive positioning and pricing power.
  • Expect heightened market volatility. Stay disciplined. Use the pullbacks in the market to take advantage of potential buying opportunities.

The information contained in this article is not a solicitation to purchase or sell investments. Any information presented is general in nature and not intended to provide individually tailored investment advice. The strategies and/or investments referenced may not be suitable for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives. Investing involves risks and there is always the potential of losing money when you invest. The views expressed herein are those of the author and may not necessarily reflect the views of Morgan Stanley Wealth Management, or its affiliates. Information contained herein has been obtained from sources considered to be reliable, but we do not guarantee their accuracy or completeness. Morgan Stanley Smith Barney, LLC, member SIPC.

CRC  4542325       03/2022

This article is based on:
US Equity Strategy / North America
Weekly Warm-up: Avoid the Blind Spot and Look for Operational Efficiency - February 28th, 2022
Weekly Warm-up: Tightening Fed and Decelerating Growth = Defense - December 20th, 2021
Weekly Warm-up: The Cycle vs Liquidity, March 15th,2021

Katerina Simonetti

Katerina Simonetti, CFP, is a senior vice president, private wealth advisor and senior portfolio manager at Morgan Stanley Private Wealth Management in Philadelphia.