Before the year even started, the stock market forecast has not been very optimistic as experts still see it as a volatile year for investments. True enough, 2022 opened with a startling conflict between Russia and Ukraine, together with the increasing interest and higher-than-imagined inflation rates. Making investments are even more risky and complicated as the market remains unsteady. These events require investors to do a more active and wiser stock selection process.
With the start of the 2nd quarter of the year, experts shared their insights on the past quarter’s performance and what the data suggests for the stock market this Q2 2022.
2022 Stock Market, So Far
A Tough Start to 2022
According to a report by BlackRock, a global investment manager and fiduciary company, the combination of numerous negative factors set the stock market into a really tough start this year. Last January 2022, the S&P 500 in the United States documented the worst record since 2009 and even hit a 10%+ decline, also known as correction territory, the following month. Investors are hesitant due to the fear of rising rates and the slow recovery of the economy which affects growth-oriented stocks the most.
On a more positive note, according to historical data, a difficult start does not automatically equate to a bad year. In fact, there are different opportunities arising from this trend—both for short and longer terms. In the short term, indiscriminate selling made enticing entry points into some stocks with high-growth potential. On the other hand, experienced investors should get ready for a shift from the typical market condition as a new environment is coming through in the post-pandemic world. Once again, this movement will require rebalancing and a greater selection process on stocks moving forward.
The investment market has been surrounded by uncertainty because of the global concerns happening right now even before the pandemic ends. With the economy starting to recover from the battle with the health crisis all over the world, a war has created a new system with skyrocketing interest and an inflation rates that the world has not experienced in decades.
As the economy slowly recovers from the pandemic that has caused huge concerns in the financial world, many experts believe there are new economic opportunities in the stock market. As expected, interest rates have skyrocketed due to a war with no scope of ending soon which added up more pressure on inflation rates. However, with this new system comes new opportunities. There will be growing sectors and companies that are poised to take advantage of these changes and make huge profits.
In the past months, it was observed that there have been big swings in the stock market caused by dramatic intraday market volatility and indiscriminate selling of stocks. Despite the short-term opportunities these present, the current global concerns point investors to the need of building resilience in their stock portfolios. According to BlackRock, this can best be achieved through diversification and a focus on quality—companies’ stocks that have characteristics of healthy cash flow and strong balance sheets are considered quality stocks.
A Call for Stock Selection
Companies are surely having a challenging time trying to navigate the higher inflation rate which has a direct effect on their cost structures. This calls for investors to be discerning in what companies to avoid for now as they are more likely be negatively affected by the continuously rising costs. On the other hand, it is time to look into the ones who have the ability to maintain their profit margins by being able to pass the higher costs to consumers.
Another thing to consider in the selection process is the companies’ products and services. Companies that offer unique products and services and have strong cost advantages are more likely to rise above the market’s current situation. Technology companies who offer labor-saving equipment are more likely to be in demand as an increasing number of companies seek to save on manpower and their high wages with software solutions and industrial equipment.
Also, choosing between growth stocks and value stocks is currently a topic of debate. Due to the rising rates of growth stocks, value stocks are currently dominating the market. Investors are opting for stocks where their capital will be returned earlier in the investment cycle due to the lack of confidence to invest caused mainly by the unsteady market. This time, growth stocks are being considered long-term investments as the cash flow has to wait longer.
A Regime Change Lies Ahead
In this time of uncertainty, experts are certain about this one thing—the investing world is now in the time of a regime change, exiting what had reigned since the 2008’s Global Financial Crisis (GFC). During the past years, the reigning regime has been made distinct by low to moderate economic growth with low interest and inflation rates. The new investment environment is still on its way but unfortunately, experts are already seeing higher inflation and interest rates compared to the previous time period (2008-2020).
Stock Market Forecast for Q2 2022
Economic Consequences of War
Due to the war raging on between Ukraine and Russia, an upward pressure is to be expected on energy prices and inflation rates. Russia is one of the top countries for exporting petroleum and fossil energy products, such as natural gas and oil, all over the world. With the sanctions in place, the war has become a source of further volatility in the global market.
Contrary to expectations, this circumstance might do stocks in the United States good compared to its counterparts in the European region. U.S. stocks are more resistant to sudden increases in energy prices and the economic consequences of the ongoing war.
Inflation and Company Profits
At some point this year, the inflation rate is being seen to settle into a range higher than the recent years (in the post-GCF era) as the current rates—which are the highest in decades—are not sustainable in the long term. In most inflations, once a balance between supply and demand has been achieved, the prices is expected to go back to being stable. However, this kind of inflation the world is going through will somehow stick which will make the prices settle in a higher range. According to “Sticky CPI” by Atlanta Fed, the worst case is that the inflation rate will settle in the three to four percent range (3-4%) towards the second half of the year.
In the last rising inflation period from 1965 up to 1982, there was a general decline when it comes to the company profit margins which is also being expected now happening relative to the high inflation rates currently. Once the inflation settles, the company’s profit margins may return to a long-run average. Although, as previously mentioned, there are companies who can rise above the situation and make use of the opportunity for profit bypassing the pressure of higher costs to consumers on a lagged basis.
Economy Slowing, But Not Recession
In the near future, the expectation is that the economy will slow down until the end of 2023, but not into recession. In the past couple of years, the economy has shown resilience more than ever and has surpassed expectations in withstanding the negative factors directly affecting it. Currently, the global economy is considered strong and positively recovering from the effects of the pandemic. Employment markets are picking up as the year is continuously shaping up as a great one for job seekers. Also, Consumer Price Index (CPI) inflation is elevated in a global scale and will continue for the time being.
Effect on Equities
The real asset is seen to remain resilient contrary to what is being feared. Equities will continue with positive earnings and dividend growth ahead as developing economies are known to support real assets. Although, the progress in the equity markets will struggle to make significant growth moving forward, a bear market is not seen ahead despite this.
Even with the fact that growth stocks have not performed well in the past quarter, a rising trend is being seen with the data related to the re-emergence of retail investors and speculative meme stocks going through a recovery period. This adds to the confidence that the global economy will not fall into recession.
Overall, the equity markets are expected to hold their line but it is more likely that the market will show little progress. If it is in a positive or negative direction, the world is yet to see.
Effect on Bonds
Due to the combination of larger interest rates, higher inflation, and notably less support from Central Banks, bonds as an asset class have failed to resist the negative pressure. This is a situation that seems to have just started and is seen to stay for a longer period. The last few quarters have already been challenging for bonds, yet it continues to be at high prices with yield levels that are not far from being decade low. With the continued upward pressure on inflation and other forces, this performance is more likely to be seen towards the end of the year. To sum up, this trend in bond yields will be evident on the market much further in the future.
The stock market is undoubtedly surrounded by many risks and challenges nowadays. Yet, investors are still being encouraged to remain calm and watchful than panic over the situation. Even though the pandemic is now considered to have little effect as a market factor, the harsh reality is that the Coronavirus is still very much around and even causes surges in different parts of the world.
So far, the year has observed negative forces that heavily affected the stock market’s movements throughout the first quarter—war, inflation, and concerns on Central Banks. Despite this, there are markets adapting and emerging from the situation which proves the resilience of some asset classes. These moments of fear and anxiety caused by the uncertainties in a global scale test investors’ forbearance. It is time to go back to the fundamentals and do an active selection for a more thoughtful construction of the stock portfolio. Doing this can provide peace to the investors and will make way for the pursuit of long-term financial goals.
Investors’ peace can be achieved by investing in assets that prove to yield positive returns in the longer run, like real estate. Even with this volatile stock market, the demand for housing is recovering because of the non-secret that investing in the real estate industry is a good move for investors who do not mind the buy-and-hold strategy and longer return of cash flow.
Investors can find peace of mind by investing in assets that prove to yield positive returns in the longer run, such as real estate. Although the stock market is volatile and unpredictable, it is a secret that investing in real estate gives investors a chance to reap high returns.
Not just as an investment, but the pandemic created a more prevalent consumer sentiment to invest in residential properties in suburban communities to support the desire to a more healthy and green lifestyle. This is why real estate, especially in rural communities near the metro, has been picking up as the economy recovers from the repercussions of the pandemic.
Brittany Corporation, one of the leading luxury real estate developers in the Philippines, built themed communities in prime suburban communities to cater to this consumer need. Brittany living promotes peace, convenience, and beauty for homeowners who wants to experience a world-class luxury lifestyle every single day.
Brittany is offering luxury houses and lot for sale, luxury condo, and luxury lots in stunning locations such as Crosswinds Tagaytay, Brittany Santa Rosa, Vista Alabang, and The Lakefront Sucat. These luxury-themed communities are built with world-class inspirations from international travel destinations that are evident in the luxury house designs, amenities, and features found in each of these neighborhoods.