From an investor perspective, 2022 has been something of a rollercoaster ride so far. This is especially true if you deal in stocks and equities, as rampant inflation and the ongoing conflict in the Ukraine have continued to weigh heavy on share prices.
This has certainly triggered yet another wave of stock market volatility since January, with the S&P 500 plummeting by 11% during the first quarter alone.
While the market remains precariously poised, however, there are some signs of hope and optimism for the remainder of 2022. We’ll address these further in the article below!
Sounding Notes of Caution – A Warning to Traders
Before we delve into the various signs that the stock market will recover through 2022, we need to address the reasons to feel caution in the current macroeconomic climate.
- Inflation Remains High: Inflation remains disproportionately high (to wage growth at least) throughout the western world, as developed nations count the cost of their Covid-inspired quantitative easing measures. In March, UK inflation reached a 30-year peak of 6.2%, with the cost of gas, fuel and food rising particularly high. This is impacting directly on consumer confidence and discretionary spending, which always translates into reduced earnings and share valuations for stocks. This trend is particularly evident in declining retail sales, which are always important from the perspective of stock traders.
- Rising Interest Rates: In order to quell soaring inflation, monetary policy makers across the world are hiking their base rate of interest. The Bank of England has raised the base rate three times in four months since December 2021, for example, from 0.1% to 0.75% in March. While this may curb inflation rates in time for the summer, it’s also likely to diminish business borrowing rates and potentially inch the UK closer to a recession if sustained over time.
- Ongoing Geopolitical Conflict: Despite ongoing peace talks, the conflict between Russia and Ukraine shows no sign of ending anytime soon. This is continuing to cause ripples of uncertainty and increased volatility throughout the financial markets, weighing heavily on stocks and overall demand. Of course, the war is also exacerbating gas and oil price hikes, ensuring that certain equities are more adversely affected than others.
The Reasons to Be Optimistic and the Green Shoots of Recovery
Even amid our notes of caution, there’s reason to remain optimistic that the stock market will recover through 2022.
After all, monetary policy changes are frequently used to manipulate the macroeconomy and eventually restore a sense of equilibrium, while the markets have already shown their capacity to bounce back from the perils of geopolitical conflict (a trend that has also been borne out through history).
But don’t take our word for it; here are some of the key signs that the stock market could be poised to rebound before 2022 is out.
- The Gradual Elimination of Covid-19 as a Pandemic: While the relatively mild coronavirus strain ‘Omicron’ and its so-called “stealth variant” continue to infect people at a significant rate in the UK, instances of serious illness and hospitalisation continue to decline. This has encouraged the government to end various restrictions and mandates, with the diseases now being treated as endemic and much less of a risk to life. Such an approach is seeing increased optimism and sentiment in the markets, while consumer spending has risen incrementally since the middle of 2021.
- The Fall in Unemployment: The rate of unemployment in the UK has also been falling consistently since the summer of 2021, reaching 3.8% in the three months to February 2022. Interestingly, this period marked a return to pre-pandemic levels of employment, while the rate of joblessness on these shores also fell by 0.2% in relation to the previous quarter. This trend is expected to continue in the near-term, delivering a boost to household wealth and subsequent economic activity (and the amount of money reinvested into the economy).
- The Growth of New Industries: We close with perhaps the most optimistic sign, as a number of new and exciting growth industries continue to drive financial market sentiment. In particular, the ecommerce, biotech and technology spaces are making significant gains in 2022, while affording investors genuine reasons to be optimistic despite the ongoing uncertainty. Don’t forget, industries that were previously devastated by Covid (such as aviation and travel) are also rebounding in 2022, offering further choice and flexibility to investors.
The Last Word – Is Now the Time to Invest in Stocks?
As we can see, there are reasons for both caution and optimism in the current financial marketplace, and there’s no doubt that stocks remain particularly volatile as 2022 proceeds.
However, we’d argue that the reasons to be optimistic far outweigh those notes of caution, especially as a number of key macroeconomic indicators continue to showcase improved performance.
Falling unemployment and increased GDP certainly hints at a potential stock market recovery in the second half of 2022, particularly if incremental hikes in the base rate help to bring inflation down and closer to the UK’s target of 2% in the coming months.
It’s such macroeconomic factors (including supply and demand) that will ultimately determine the future course of the stock market, and there’s no foolproof way of predicting whether share prices will rise or fall going forward.
However, the signs of potential growth and recovery are hard to ignore, while now may arguably be the ideal time to buy into the stock market at a time when certain shares are noticeably undervalued!