It has been another bullish year for the stock market in 2021, supported by the pandemic-induced stimulus.
Technology stocks led the equity market rally, but Asian stocks struggled after a strong start in the first quarter.
In fact, the US stock market was just shy of its all-time high after the Santa Claus Rally that we saw over the past week.
Recall that I talked about how the lower Chicago Board Options Exchange (CBOE)’s Volatility Index (VIX) would set the stage for the Santa Claus rally that we’ve just witnessed.
It is worth noting that the tech-heavy Nasdaq 100 has not bounced back as quickly as the S&P 500 Index and the Dow Jones Industrial Average recently.
This is likely due to the rotation into value stocks such as financials, energy and some industrials in anticipation of the US Federal Reserve’s rate hikes in 2022.
The quick rebound from the dip, however, shows that Wall Street remains comfortable with the expected three rate hikes next year.
Inflation remains one of the key risks to look for in 2022 but the yield on 10-Year Treasuries, that has not scaled a new post-pandemic high since March, suggests that market participants expect interest rate will not peak too high with the Fed’s early action to curb inflation.
A moderation on inflation and the gradual reopening of the economy will provide another catalyst of growth for corporates’ earnings.
This is part of the reason why we have seen earnings forecasts being revised upwards despite the risk from the Omicron variant.
The risk remains with the new variant but the market is not expecting the lockdowns that we have seen in the initial parts of the pandemic.
Will the S&P 500 march towards 5,000?
The US S&P 500 Index continues to show its resilience despite the pandemic and has outperformed most markets.
My view is that if inflation does level off in the first half of 2022 and the COVID-19 pandemic situation is no longer as worrisome as what it was initially, the US and global equity markets could be poised to extend gains.
While the Fed’s taper and rate hikes would dampen some of the optimism on growth stocks, a reopening of the economy bodes well for the services sector, which would give corporate earnings another leg up.
With the S&P 500 already on the verge of breaching the 4,800 level, the next major target would be the 5,000 milestone.
Having said that, there are plenty of risks and uncertainties in 2022 as the world shifts towards normalisation.
In the near-term, focus will be on the Omicron variant but there is also the need to watch out for other signs such as stagflation, a worsening supply chain bottlenecks and the rising geopolitical tension especially between the US and China.
I have not even talked about the uncertainties that could be triggered from the rise of unregulated digital assets such as cryptocurrencies and non-fungible tokens (NFTs).
One thing is certain – the stock market ride is about to get bumpy ahead.
Source: Refinitiv Datastream, Investing.com