It’s forecasting season. The MoneyWeek inboxes are fast filling up with everyone’s views for 2022. This is, of course, mainly for entertainment and attention-grabbing purposes. As John Authers notes on Bloomberg, in the long term you can be pretty sure that stockmarkets will track economic growth. In the shorter-term, however, you can be sure of nothing.
Average market returns knock around 6%-8% a year. But in a single year you hardly ever get the average: the most common result is between 10% and 30% – and a loss of 20% is more likely than a 0%-10% gain. Yet most analysts opt for end-of-2022 targets about 8% above wherever the S&P 500 is when they write the forecast. That probably feels safe – but judging by history, almost certainly wrong. It might be better for analysts to skip the faux precision and simply bet on “up a lot” or “down a lot” – on something extreme rather than something average happening.
One group that does so is Saxo Bank: every year for the last 20 years, it has released Ten Outrageous Predictions – not forecasts as such, but outlier possibilities others aren’t quite brave enough to put on paper. To hear the lot, listen to next week’s podcast (with Steen Jakobsen, Saxo’s chief investment officer). But the key theme behind all the 2022 predictions is “revolution” – the idea that there is so much friction building across the globe, between rich and poor, young and old, inflation and deflation, the rentier class vs the working class (as in, people who actually work), women vs men, and ESG vs (for example) the need to supply the world with cheap but green energy, that something has to change. Most people, says Jakobsen, reckon 2022 will see a return to a pre-pandemic market “normal” (low inflation, low interest rates, high returns). But all these touch points suggest something else – that we are much closer to major change than to “more of the same”.
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What might that mean? One prediction I suspect MoneyWeek readers will not think outrageous is this: “US inflation reaches above 15% on wage-price spiral”. For now, says Saxo’s Christopher Dembik, Federal Reserve chair Jerome Powell believes millions of Americans will give up on the Great Quit (they’ve been leaving the workforce in droves) and return to fill some of America’s 10.4 million open positions. “But this is plain wrong.” The pandemic has fuelled “a great awakening of workers”. They feel empowered to “demand a better experience” – better conditions, pay, perhaps even a sense of purpose. Given the labour shortage (and falling birth rates) they have the power to get at least some of what they want (as they do in the UK).
Add that to supply-side inflationary pressures (it’s easy to order stuff on Amazon in a semi-lockdown, it’s harder to make and deliver it) and to rising energy prices, and it isn’t ridiculous (maybe not even outrageous) to suggest that US inflation could be into double figures by the end of next year. The Fed may be on top of this. But it probably isn’t – in which case expect extreme volatility in all equity and bond markets. What do you do about all this? The usual. Look for long-term resilience at a reasonable price; hold a little gold; have broad commodity exposure; hold some cash for its optionality (if the extremes of next year involve major market moves down, you can buy) and hope for the best. Perhaps start with this week's magazine, where Richard Beddard looks at UK stocks to buy and hold.
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