Two major risks facing U.S. stocks in 2022

From 1990 to 2020, US stocks experienced 6 corrections in the fourth quarter. Since November 2021, in the context of repeated epidemics and rising inflation expectations, U.S. stocks may once again fall into a "strange circle" of adjustment. This article focuses on reviewing 2018, which is similar to the economic fundamentals of 2021, and using history as a mirror to look forward to the risks that U.S. stocks may face in 2022.

The analysis of the performance of various industries in the six US stock corrections from 1990 to 2018 shows that the performance of the defensive sector has been verified, and the medical sector has had excess returns relative to the S&P 500 index in each callback .

In addition, public utilities and mandatory consumption have also achieved good results, with 5 out of 6 market corrections reaping excess returns. Judging from the causes of the U.S. stock market's correction in the fourth quarter, except for the Fed's policy error in 2018, the other causes are all incidents (such as the European debt crisis, Lehman incident, etc.).

The economic fundamentals in 2018 are similar to the situation today (November to December 2021): the job market is recovering but inflation is overshooting. In 2018, in response to inflation, the Fed raised interest rates four times, one in the first quarter and one in the second quarter, which did not have a significant impact on the stock market. However, in the fourth quarter, the Fed raised interest rates twice, bringing interest rates to the highest level since 2008. Excessive rate hikes caused the S&P 500 Index to fall by nearly 20% in the fourth quarter.

The first wave was caused by the epidemic. On November 24, South Africa reported to the WHO a highly contagious variant strain Omi Keron; on November 26, the WHO announced that Omi Keron was listed as a "variant strain of concern", and the S&P 500 index on that day A drop of 2.3%, breaking the upward trend since October.

The second wave is caused by the anticipated increase in interest rate hikes due to the superimposition of the epidemic. December Bao Weier and other Fed officials continue to stand admit non-transitory inflation meeting on interest rates and bitmap hawkish turn, in addition to the Austrian McCormick Rong replace Delta to become America 's new mainstream crown and cause new strains The number of cases has increased sharply. Under the combined effect of the two, US stocks fell continuously from December 16 to 18.

In terms of industries, defensive medical and public utilities have outperformed cyclical industries in the two waves of declines in the market since November 2021. In the second wave of declines, mandatory consumption rebounded strongly

Looking ahead to 2022, U.S. stocks will still face two major risks: repeated epidemics and excessive interest rate hikes. However, as shown in Figure 6, the impact of several waves of epidemics on U.S. stocks is diminishing. With the increase in the sensitivity of policy response to the epidemic, we expect that the impact of repeated epidemics in the future on U.S. stocks will be limited, but we need to be alert to the risk of correction caused by inflation. .

The suppression of growth stocks by high inflation in the United States has already appeared. Since the epidemic, the Fed has adopted an extremely loose monetary policy to support the economy. However, since June 2021, inflation has continued to hit new highs, forcing the Fed to announce an accelerated taper at the December interest rate meeting, and the dot matrix chart for the number and pace of interest rate hikes in 2022. The hawkish turn. ??

When interest rate expectations and real interest rates rise, the discount rate increases, which suppresses high-value, long-duration growth stocks.From November 1 to December 20, US growth stocks underperformed value stocks. In 2022, under the market expectation of a tightening of the U.S. monetary policy, we should be alert to market fluctuations in high-valued, long-term growth stocks.