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 Canaccord Genuity Corp.

Outlook for 2022: More COVID-Watching

Delwin Graham - Jan 12, 2022
What can we expect in the coming year? Any market forecast for 2022 ultimately comes down to predicting the continued impact of the COVID-19 pandemic, particularly given the latest spike in cases and uncertainty caused by the new Omicron variant.

We expect 2022 to be just as interesting for investors as 2021. If you remember, we began 2021 at the peak of a global pandemic, with businesses, schools, and workplaces shuttered and most people sheltering at home. Now we have the Omicron variant driving COVID-19-related hospitalizations to record levels. While some jurisdictions are shutting down with curfews and instituting mandatory vaccinations, most are waiting to see whether such draconian measures are required.

Governments provided unprecedented levels of monetary and fiscal stimulus last year, which (unsurprisingly perhaps) greatly stimulated economies and markets, especially in the U.S. and Canada. When the dust settles, economists forecast that the U.S. GDP for 2021 will come in at 5.6%, the best figure since 1984. Canada’s GDP in 2021 is expected to have grown by 5.69%. (Cf., Matt Benjamin, “2022 Investment Outlook”, www.investmentu.com. Jan. 7, 2022)

Near-record corporate earnings in 2021, coupled with massive liquidity (due to all of that stimulus and low-interest rates), pushed the S&P 500 Index to finish the year near an all-time high. However, individual stocks often didn’t fare so well – and 93% of the constituents of the S&P 500 experienced a selloff in excess of 10% in 2021. It seems the resilience of the market was at an index level – certain sectors saw significant weakness, like precious metals, solar, internet content, and financials (credit). (Cf., Anna-Louise Jackson, Benjamin Curry, “2002 Stock Market Outlook”, www.forbes.com, Dec. 28, 2021)

What can we expect in the coming year? Any market forecast for 2022 ultimately comes down to predicting the continued impact of the COVID-19 pandemic, particularly given the latest spike in cases and uncertainty caused by the new Omicron variant. But the coronavirus, and each of its mutations, is a biological entity that has economic implications. Hence, there is always the potential for it to continue to disrupt supply chains, impact global markets demand, and contribute to inflation. We can expect investor confidence to continue to toggle between optimism and pessimism.

Whereas market growth in 2021 was pushed by government stimulus (both monetary and fiscal), these programs are meant to be stopped or scaled back in 2022. To this point, federal policymakers in the U.S. have accelerated the tapering of their bond‑buying program, citing inflation that has exceeded their 2% target.

Investors can expect the U.S. Fed to be one of the “dominant forces” influencing the market’s trajectory in 2022. But the central bank’s policy shifts must be viewed in the context of broader market sentiment – and a change in sentiment remains the biggest risk to the market.

Given that backdrop, investors can expect more speculation about a market correction in the year ahead. The S&P 500 Index hasn’t seen a full correction since the bear market in early 2020. A decline of 10% to 20% has occurred about once every 19 months, on average, going back to 1928. A lot of investors and market pundits believe that we are due. (Cf., Jackson and Curry, “2022 Stock Market Outlook” …)

Given that coronavirus is a biological entity with economic ramifications, it will always be a wildcard. We can expect market sentiment to continue to gyrate between bullishness and bearishness (sometimes on the same day) and the recent bout of market volatility to continue. The risk trade might be off for a while. Investors will likely be looking for names that are growing their business at a healthy and sustainable rate with the clear ability to pass on any inflationary pressures.

We see 2022 as a stock picker’s market. Opportunities will arise from increased volatility and shifting sector leadership, causing investors to focus on company-specific attributes like recurring revenue, market leadership, pricing power, and a solid balance sheet.

Canadian bank stocks should continue to benefit. Most have recently announced dividend increases and share buybacks that follow the Office of Superintendent of Financial Institutions’ removal of restrictions. The reversal of loan loss provisions instituted during the pandemic should also bolster the banks’ earnings.

In fact, this might be Canada’s year. The TSX is blessed with a bevy of large-cap, dividend-bearing stocks, like RY, BCE, CU, SU. If cash is paying zero, and ten-year bonds pay only 1.4%, then income should continue to bid up the Canadian dividend-income sector in 2022.

But if you are looking to invest for growth in the large-cap technology sector, you won’t be coming to Canada. Opportunities related to the increased adoption of technology will continue to arise in 2022 – it’s not just a COVID thing. The U.S. tech sector functions to allow companies to reduce the cost of goods sold and increase their output. For this, they will continue to be rewarded.

All in all, we feel that volatility in 2022 will foster a stock picker’s market. Feel free to contact me at dgraham@cgf.com or 780-408-1518 to discuss a few stocks to pick.