Bloomberg Opinion: By Mark Gilbert and Marcus Ashworth
In financial markets, the trend was undoubtedly your friend in 2021. Vaccinations meant economies could come out of pandemic-induced lockdowns while fiscal stimulus produced a rapid rebound in employment, propelling stock markets to record highs. In fixed income, central banks maintained their quantitative-easing programs, leaving bond yields becalmed. Next year looks a lot trickier.
Inflation is accelerating everywhere, and the supply-chain disruptions that contributed to rising consumer prices aren’t fixed. Labor-market dislocation has given employees bargaining power for the first time in years. Equities are starting to look overheated, particularly if central banks have to react to price pressures by tightening monetary conditions in the coming months. And the omicron variant shows that the coronavirus remains a clear and present danger. Fear could replace greed as the dominant market driver in 2022.
$119,717,895,834,140 Reasons to Be Wary
That’s the total value of global equity markets, which reached a record of $120 trillion and has doubled from the low point reached at the start of the pandemic in March 2019. The rise has been relentless.
U.S. technology companies have played a big role in turbocharging the gains; Apple Inc. alone contributes almost $3 trillion to the global total, with Microsoft Corp. and Amazon.com Inc. between them adding a further $4.1 trillion. But the prospect of the Federal Reserve turning off the monetary spigot has divided strategists; their estimates for the S&P 500 index at the end of next year range from 4,400 to 5,300, a 20% gap that Bloomberg News reports is the second-widest in a decade. While the highest number would mean a 14% advance from current levels, the low forecast predicts a 6% retreat.
Government bonds have offered scant competition to stocks. But that’s starting to change. Although U.S. Treasuries have remained calm amid the Fed’s hawkish pivot, there’s been a steady rise from the low yields seen during the early stages of the pandemic.
Bonds yielding more than equities has been the historic status quo, but in the new normal of ginormous stimulus it is quite rare. Equities are no longer the obvious place to park money now that fixed-income returns are starting to stir.
Scream If You Want to Go Faster
Rising consumer prices have rattled policy makers. What looked like a temporary jump in reaction to supply shocks coinciding with post-lockdown spending rebounds and an energy crunch has transmogrified into a more worrying trend.
Inflation expectations matter as much as the actual rate of change of consumer prices. If those expectations start to become untethered from the 2% pace widely targeted by central banks, policy makers may endanger the nascent growth recovery by raising interest rates before the economy is sufficiently robust to withstand higher borrowing costs.
Fed Chairman Jerome Powell led the charge by central bankers to dismiss the spike in consumer prices as “transitory.” Bloomberg’s News Trends function, which tallies the occurrences of keywords in articles from more than 1,500 sources, shows he at least sparked a debate about whether price rises would prove to be sticky or not.
Earlier this month, Powell told lawmakers it was time to “retire” the term. A key question for next year will be whether inflationistas, who’ve been wrongly predicting for a decade that monetary stimulus would fuel rising prices, will finally be right.
Credit Not Keen on Inflation
Credit spreads — the premiums corporate issuers offer above benchmark government yields — had settled back into their pre-pandemic groove of inching steadily tighter, but the post-summer inflation scare caused a major hiccup. Nonetheless, the economic backdrop has dramatically improved — aided by huge stimulus, rising profits are improving creditworthiness — so credit spreads are set fair for 2022. U.S. spreads have generally performed better than in Europe, where they are ending the year higher than they started.
The corporate new issue market has ground to a halt earlier than usual this December thanks to the omicron variant. This year had a shot at beating 2020’s 480 billion-euro ($542 billion) record for corporate deals out of Europe in all currencies but fell 20% short. U.S corporate issuance is also down by a fifth from 2020’s banner year of $1.75 trillion. Still, pent-up demand should mean 2022 starts with extra momentum.
Unconventional, to Say the Least
The biggest emerging market casualty this year was Turkey, which makes a change from Argentina. President Recep Tayyip Erdogan shows little sign of abandoning his battle with economic orthodoxy, declaring himself the “enemy of interest rates” in the unconventional belief that faster inflation is caused by keeping official borrowing costs too high.
Even as Turkish inflation has soared above 21%, its central bank has cut its benchmark rate four times in as many months to 14%, leaving the nation with one of the largest negative real interest rate differentials in the world. The lira is poised for another bad year.
Not So Grand
China Evergrande Group, a huge real estate developer with more than $300 billion in liabilities, has been heading toward default for most of 2021 and has now crossed the Rubicon of failing to pay coupons on some of its dollar-denominated debt, as well as its domestic borrowings. This is now an external and internal China crisis that will take years to unravel and restructure, with different outcomes for its many creditors.
A damage-limitation exercise is underway by the authorities to prevent contagion spreading across the entire property sector, which is a fundamental element of China’s economy. A bail-in of institutional investors, similar to previous bank collapses, looks inevitable to spread the load across the system.
Sometimes, the journey is as important as the destination. Bitcoin is currently in line with its 2020 average of about $47,000. But it’s been as high as $68,000 and as low as $29,000. A stablecoin it ain’t.
Regulation could make or break cryptocurrencies. A scammers’ paradise or digital gold? Ponzi schemes or the future of money? The coming year will decide.