10 Market Factors Advisors Should Eye Heading Into 2022

As financial advisors and clients start to dive into holiday mode, and 2022 sneaks up, there are numerous factors impacting how the markets function. Advisors should be taking these into account.

As experienced advisors know, many clients use their free time in late December to look inward. That often leads to a deluge of questions about the investment strategy their advisor has in place now, and what they have in mind for the new year.

Don’t let 2022 creep up on you. Halloween is over, and the creeping should be over, too. Be proactive in understanding the many factors that will drive markets from here into next year and beyond.

Given what investors have seen in years like 2018, when the S&P 500 took a December dive of 15% in three weeks, recognizing these portfolio influences early is a good idea.

Even if you use a third-party service to do your investment strategy work for you, at the end of the day, the client is looking to you as their guide. Here’s a look at 10 investment strategy factors you’ll want to be prepared to discuss with clients.

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When it comes to inflation, some strategists are sounding the alarm as food and energy prices rise. Others are using phrases such as “transitory” to describe a temporary lift in the cost of living.

Either way, inflation is a more active topic than it has been in a long time. So far, the bond market has cared more than stocks have, with bonds selling off while stocks tread water.

As always, the biggest issue for your clients may not be the announced inflation level itself. Instead, it’s the willingness of the markets to freak out about the fear of inflation. That alone can shake portfolio levels.

[Read: Advisors: Is It Time to Adjust Your Investing Strategy?]

Federal Reserve Policy

The Federal Reserve recently signaled the start of its awaited reduction in the pace of its long-running bond purchase program.

While a so-called “taper” of that program may not mean much in relative dollars, given the Fed’s bloated balance sheet, it has the potential to be an emotional pivot point for the markets. If that doesn’t happen in 2021, then look out for it in 2022.

Weak Bond Returns

Over the past 15 months, the 10-year U.S. Treasury bond rate has moved from 0.5% to nearly 1.6%, while high-yield bonds yield less than they once did.

That likely produces two outcomes in 2022 and the years beyond. Either bond portfolios will earn low positive returns, they will lose a little or they will lose a lot. Of those three potential outcomes, two are bad, and none of them are great.

U.S. Fiscal Policy

Congress’ trust level with voters and investors is low. And no matter what decisions are made on infrastructure, taxes and other initiatives, there will be market noise and partisan rancor.

This is a double-edged sword for advisors. They need to intelligently discuss the topic with clients , since markets will be impacted. However, advisors want to be careful in their communication, given the charged political climate that has enveloped Americans for decades. Tread carefully.

Retail Investors

Big investors used to scoff at “the little guy.” Now, the playing field has somewhat leveled.

While some investors have used the era of zero-commission trading and ubiquitous investment opinions to become stock market gamblers, there are plenty who have jumped at this opportunity to learn how to invest like professional portfolio managers do.

This might involve creating their own process and decision-making structure, or learning and copying someone else’s techniques. Either way, this threatens a part of the financial advisor’s world. Sophisticated financial planning still requires knowledge that professionals such as certified financial planners have developed. But many retail investors are concluding that they can invest their money the way you do for them, and for much lower cost.

The sheer size of the retail investor market prompts seasoned investors to adjust, embrace and educate them. And while these investors may not have been through an extended bear market cycle for stocks or bonds, and may not know what they don’t know, you cannot count on them to come running to you after the next bear market. Let’s face it: Many advisor-produced investment portfolios don’t stand up well in rough markets, either. The bottom line is to meet the retail investors on their terms by adding value through your experience and direct access to expertise.

[Read: How Advisors Can Succeed, Even in Bear Markets.]

Big Tech Stock Dominance

Just five stocks, Meta Platforms Inc. (ticker: FB), which will soon trade as MVRS, Google parent Alphabet Inc. ( GOOG, GOOGL), Netflix Inc. ( NFLX), Apple Inc. ( AAPL) and Amazon.com Inc. ( AMZN), constitute about 22% of the S&P 500 and 41% of the Nasdaq 100.

You may look at this as a deceptive lack of diversification. Clients think their money is spread across 500 stocks when they invest in the S&P 500, but in reality, most of those stocks don’t matter to the index.

Or you could view it as counting on continued success from yesterday’s winners. But your investment process has to account for this very dot-com-style phenomenon.

Post-Pandemic Economic Growth

The coronavirus pandemic wrecked a lot of things. One of the more recent casualties is supply chains and year-to-year comparisons of key economic data such as employment, factory orders and consumer sentiment.

This reality opens up you and your clients to a wide array of spin techniques from Wall Street firms, which can use the chaotic patterns in these figures to try to say whatever fits their agenda. Be the one that helps your clients cut through the fog, get clarity and find comfort in their investment positioning.

Market Sentiment

The fear of missing out, or FOMO, investors are experiencing is off the charts.

Just ask happy Bitcoin investors. When an asset is talked about one day as a currency, the next day as a gold replacement and “store of value,” and the next as simply the future of our financial system, all your clients want to know is how to score some.

This is where you need to truly get to the bottom of what they want out of their investment portfolio. Cryptocurrency is one way to speculate on a volatile asset class that has yet to achieve “tenure” in the investment markets. However, it is far from the only way for them to add some high-risk, high-return potential assets to a slice of their portfolio.

The key here is sentiment. While it is still at a fever pitch, advisors can identify what the herd is buying with both hands and join them. Some recent examples include alternative energy, financial technology, cybersecurity and some of the lesser-known commodities such as lithium. Do your research and don’t overdo it in terms of how much you allocate to these attempts to profit from unusually strong investor sentiment.

Corporate Earnings

These used to matter because they truly told you something about how a business was progressing. But these days, beating expectations is what moves stock prices.

That concept has fed on itself for a couple of decades, and it has created an environment where any company, no matter how solid and sustainable, can see its stock price drop by 10% or more in reaction to quarterly earnings announcements. And that’s in a bull market.

This is something your long-term-oriented clients need to accept as part of equity investing. Or you can help them by making room for tactical strategies alongside their long-term approach.

Equity Valuations

Naturally, there are always folks who will try to justify market valuation levels as reasonable or even inexpensive. But with the Fed having pumped support into the commerce system for the past five years, there is likely a lot of air under those valuations.

They are high and can stay high for a while, but this reality will matter. As with so many items on this list, it’s all good until the market masses decide it’s a problem. When that happens, the herd runs to the exits like someone yelled “fire” in a crowded theater. And you’ll be left explaining to clients why their portfolios took a nosedive.

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10 Market Factors Advisors Should Eye Heading Into 2022 originally appeared on usnews.com

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