New York (CNN Business)It’s been a year of worries for investors, from geopolitical strife to inflation to the pandemic, and it doesn’t look like the worries are easing anytime soon.
The combination of these key macroeconomic and geopolitical issues will make it difficult for stocks to climb out of their hole and end 2022 in positive territory, some experts say.
“There are far too many headwinds to expect good returns for stocks this year,” said David Spika, GuideStone Capital Management’s president and chief investment officer.
Despite big Wall Street rallies over the past two days, the stock market as a whole has tumbled in 2022. The Dow is down nearly 7% this year, the S&P 500 is down about 10%, and the Nasdaq is down more than 15%.
Three concerns in particular weigh on the stocks. Russia’s invasion of Ukraine has pushed up oil prices.
Previously, investors were already concerned about inflation and the likelihood that the Federal Reserve would hike rates several times this year to fight it. Meanwhile, Covid-19 hasn’t gone away, and the recent spike in cases in China has set alarm bells ringing.
“I don’t see an opportunity for positive returns for stocks,” Spika said, adding that it would be a win if stocks fell “just” in the single digits this year.
Uncertainty continues to weigh on investor sentiment
Spika said it was unreasonable to expect the crisis between Russia and Ukraine to end soon. And even if that were the case, Spika argues that stock valuations are too high given the upcoming rate hikes.
“Slumps in the double-digit percentage range are possible. The past few years have been strong and that has been fueled by easy monetary policy,” he said. “The tailwind will soon become a massive headwind.”
Stephanie Lang, chief investment officer at Homrich Berg, agreed that “the age of easy money is over.”
While the Fed’s higher interest rates are high on investors’ minds, that’s only part of the problem for the stock market.
“The list of bearing loads is quite long. We have the war, the reminder that the pandemic is endemic, and significant, long-lasting disruptions to supply chains,” said Vincent Reinhart, chief economist at Dreyfus and Mellon. “Investors are understandably hunkered down.”
Reinhart added that the Fed is likely to hike rates several times this year to try to curb inflation. However, there are concerns that the central bank has waited too long to hike rates and may now face a problem of stagflation, the combination of slow growth and high prices.
“It’s going to be difficult for the Fed to get it right,” Reinhart said. “Any sane person would say recession risks are higher today than they were six months ago.”
Lang believes the central bank has “missed the inflation mark” and needs to take more aggressive steps going forward.
The Fed is in a tough spot, but some are hoping it won’t hike rates too much
Other experts are not so sure that big steps are ahead. They say the Fed recognizes the risk of going overboard with rate hikes and that gradual, small increases may not slow the economy too drastically. That could mean the worst for stocks could be over soon.
“If the Fed overshoots rate hikes, that would be a longer-term problem for the economy,” said Louise Goudy Willmering, a partner at Crewe Advisors. “But if the Fed isn’t too aggressive, we can still have growth. The economy doesn’t have to fall off a cliff.”
Willmering also said it is far too early to give up hopes of a market recovery later this year. It’s only March, after all.
Of course, it can be difficult for stocks to stage a huge rally like the one that followed “the fear-driven pullback of 2020,” she said. However, she added that earnings growth could return to more normal levels when worries over Ukraine and supply chain issues finally ease, which would boost equities.
While the broader market continues to struggle, there can be some strengths.
Lang said investors should look for quality, safe-haven stocks that pay dividends, such as consumer goods companies and healthcare companies. And Spika said energy stocks and smaller companies, which are more dependent on the US economy than international markets, should also do well in a rising interest rate environment.
But even if stocks rebound as they have in the past few days, there could still be more volatility — which could create better opportunities for investors.
“When do you start shopping?” said Spika. “As soon as we get clarity on what’s going on in Ukraine.”
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