COVID-19. War. Inflation. Recession fears. The stock market is failing

A combination of these underlying macroeconomic and geopolitical issues will make it harder for stocks to get out of the pit and end 2022 in positive territory, some experts say.

“There are too many hurdles to expect good stock returns this year,” said David Spica, president and chief investment officer of GuideStone Capital Management.

Despite the big rallies on Wall Street over the past two days, stock market fell overall in 2022. Doe down almost 7% this year, S&P 500 dropped by about 10% and Nasdaq differs by more than 15%.
Prior to this, investors were already worried about inflation and the likelihood that the Federal Reserve would raise interest rates several times this year to fight it. Meanwhile, Covid-19 has not gone away, and the recent spike in cases in China is alarming.

“I don’t see any way to get positive stock returns,” Spica said, adding that it would be a win if stocks “only” drop single digits this year.

Uncertainty continues to weigh on investor sentiment

Spica said it was unreasonable to expect the Russian-Ukrainian crisis to end anytime soon. And even if that were the case, Spica argues that the stock’s valuation is too high given that interest rates are about to rise.

“Probably a double-digit percentage drop. The last few years have been strong, helped by loose monetary policy,” he said. “This tailwind is about to turn into a massive headwind.”

Stephanie Lang, chief investment officer of Homrich Berg, agreed that “the era of easy money is over.”

While the Fed’s higher interest rates are haunting investors, this is only one part of the problem for the stock market.

“The list of stock loads is quite long. We have a war, a reminder that the pandemic is endemic and significant, prolonged supply chain disruptions,” said Vincent Reinhart, chief economist at Dreyfus and Mellon. “Investors are understandably squatting.”

Reinhart added that the Fed is likely to raise rates several times this year to try to contain inflation. But there are fears that the central bank has delayed raising rates for too long and could now face the problem of stagflation, a combination of slow growth and high prices.

“It will be difficult for the Fed to get it right,” Reinhart said. “Any sane person would say that recession risks are higher today than they were six months ago.”

Lang believes the central bank “has missed its inflation target” and will have to take more aggressive steps going forward.

The Fed is in a quandary, but some are hopeful it won’t raise rates too drastically

Other experts are not so sure that there are big steps ahead of us. They say the Fed is acknowledging that there is a risk of overdoing the rate hike, and that a gradual, small hike might not slow the economy too much. This could mean that the worst for stocks could soon be over.

“If the Fed exceeds its rate hike plan, it will be a long-term problem for the economy,” said Louise Goody Wilmering, partner at Crewe Advisors. “But if the Fed doesn’t get too aggressive, we could still have growth. The economy should not fall off a cliff.”

Wilmering also said it was too early to give up on hopes for a market recovery later this year. After all, it’s only March.

Of course, it can be difficult for stocks to prepare for a huge rally like the one that followed a “fear-driven drop in 2020,” she said. But she added that if worries about Ukraine and supply chain problems finally subside, revenue growth could return to more normal levels, leading to higher inventories.

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Even if the broader market continues to struggle, there may be some pockets of strength.

Lang said investors should look for quality safe haven stocks that pay dividends, such as consumer goods companies and medical firms. And Spica said energy stocks and smaller companies more exposed to the US economy than international markets should also do well in a rising rate environment.

However, even though stocks are recovering, as they have been in the past few days, there could be more volatility ahead, which could create better opportunities for investors.

“When will you start buying?” Spica said. “As soon as we get clarity on what’s going on in Ukraine.”

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