Wall Street’s 2022 Outlook – New Challenges And Opportunities

Wall Street chugged through 2021 on an easy money, novice investor track. However, looking back, the track is littered with baggage – inferior IPOs (Bloomberg: “Record-Setting Year for IPOs Fails to Deliver Historic Returns“) and fizzled fads (Forbes: “2022 Stock Market Outlook: 2021 Fads And Fashions Are Forgotten“).

But the times are changing, and 2022 will bring Wall Street new, attractive opportunities that will be both challenging and rewarding.

2022’s opportunities match Wall Street’s strengths

Growth through easy money and deficit spending is being replaced by realistic expectations, planning and actions. Add in the Federal Reserve move to market-determined interest rates, and the 2022 outlook necessarily includes shifts in the financial markets. Among the shifts will be serious valuation adjustments of all assets, not just bonds.

Leaving are the Fed’s historically extreme policies: negative real interest rates and huge bond warehousing. Also exiting is the byproduct of carrying out these actions for a dozen years – the Fed-caused alteration of the financial industry’s accepted beliefs.

Therefore, in a return to “normal” financial market operations, not only will rates and valuations shift, but so, too, will participant beliefs. And that brings us to Wall Street.

Wall Street operates on brain power and wisdom. A primary focus is on anticipating what lies ahead. If that is done well, all the rest (money management, financial advisory, product innovation and capital raising) falls in place. Therefore, expect Wall Street to lead the charge away from the old to the new.

The 2022 bogey man, inflation, boosts Wall Street’s opportunities

Coincidentally with the changes above, inflation will play a bigger role. There will be a return to focusing on “real” yields and returns —i.e., the subtraction of the inflation rate from gross yields and returns. Maintaining purchasing power will set the floor for the shortest, safest fixed income securities. (When completed, this shift means a 3-month US Treasury Bill in a 2% inflationary period will yield about 2.00% – not the 0.07% in today’s market.)

All other securities will have higher yields and/or expected returns, increased to compensate for the added maturity risk and/or credit risk. Thus, the 10-year UST note yield would rise from its current 1.5% (a negative real rate of -0.5% in a 2% inflation period). That 10-year yield, in turn, will once again be an important ingredient in analyzing other securities.

The need for speed

Nothing incentivizes action more than inflation because lost purchasing power affects everyone – investors to savers, income earners to annuity recipients, banks to insurers, producers to service providers, nonprofits to governments, and web-sellers to retailers. All are pressed to search for ways to increase income and control expenditures.

Speed is critical. Being late can mean never catching up. For a current example, see The Wall Street Journal article, “Food Companies Are Having Trouble Keeping Up With Inflation.”

“Historically, food companies have been able to weather episodes of inflation after a lag, as price increases take time to catch up to rising costs. Ultimately many come out better positioned as price hikes stick even as commodity prices eventually fall. The problem this time is that inflation is proving to be stronger and longer lasting than many anticipated, not just with respect to food ingredients and packaging materials, but also factors like freight and labor.

“The historical pattern should still hold, but the timing of eventual stabilization and recovery keeps getting pushed back, says Barclays analyst Andrew Lazar.”

The bottom line – 2022 offers Wall Street excellent opportunities

As an investor, owning stock in a Wall Street firm is like betting with the house (sort of). However, the firm’s success depends on the abilities of the firm. So, the best approach is to own the stocks of those that have the resources, skill and savviness to find and successfully pursue the opportunities.

Goldman Sachs

GS
and Morgan Stanley

MS
seem natural choices, as does JPMorgan Chase

JPM
. While smaller firms might be more adroit, the huge shifts that are about to happen will likely require the clout and reputation of the large firms. Each has proven itself in past environments.

Disclosure: Author recently bought Goldman Sachs, Morgan Stanley and JPMorgan Chase common stock