Ten Predictions For 2022

Making predictions is always tricky, and short-term forecasts are seemingly more difficult than long-term forecasts because timing plays such an important role. That said, predictions can be fascinating and informative, even if some if not many of them turn out not to occur. Below are ten predictions that, if they were to occur, might influence the economy and the capital markets in 2022.

1. The Consumer Price Index decelerates during the first half of the year. During the first six months of 2022, the inflation rate decelerates slightly as the dollar strengthens and many commodity prices (temporarily) weaken. The basis of this prediction is two-fold. First, without any new stimulus bills, the level of Federal government spending is set to decline by $1.3 trillion vs. last year, with a large part of the year-over-year decline occurring during the second quarter. That projected drop in Federal spending represents approximately 6% of U.S. GDP. Second, even though Federal spending is forecasted to decline this year, the Federal Reserve has become increasingly concerned about inflation and is starting to tighten monetary policy. Just as fiscal stimulus and monetary stimulus combined are likely to create inflationary pressures, the combination of fiscal tightening and monetary tightening is likely to reduce inflationary pressures. 
2. The stock market corrects during the second quarter. Along with commodity prices, stock prices become pressured in Q2 (more than they have in January) in response to the combination of fiscal and monetary tightening described above. Congress reacts to the correction by passing a new multi-trillion dollar bipartisan fiscal stimulus bill to protect their mid-term election prospects. The bill contains several of the Build Back Better bill’s provisions and enough pork to persuade a few Republicans to support the bill. At the same time, the Federal Reserve announces that it will immediately begin buying U.S. Treasuries at an accelerated rate to stimulate the economy and finance all of the new government spending. The stock market recovers quickly in response to these new fiscal and monetary stimuli.
3. Gold regain its shine. The year 2022 turns out to be a good time to own gold. After a lackluster 2021, the price of gold increases to above $2,000/ounce in anticipation of and, subsequently, in response to a depreciating dollar and lower interest rates resulting from these new fiscal and monetary stimulus measures. Gold begins to outperform as an asset class as Mr. Market starts to smell the upcoming debasement of the dollar. Reversing decades of anti-gold rhetoric, Warren Buffett decides to buy gold for the first time, purchasing over $10 billion of physical gold with Berkshire Hathaway’s cash.
4. The U.S. stock market underperforms the rest of the world’s stock markets. Towards the end of the year, as Treasury bond yields decline while expected Federal deficits increase, the Euro, Yen, and most emerging market currencies rise in value vs. the U.S. dollar. The U.S. stock market, while generating a positive return in 2022, underperforms other developed and emerging markets for the first time in several years. Notably, the U.S. stock market also underperforms gold in 2022.
5. Energy prices continue to rise. Political, capital market, and geological constraints continue to limit capital investment commitments to energy exploration. The price of oil exceeds $100/barrel. Traditional energy stocks and alternative energy stocks appreciate more than 20% in 2022 due to an increasing expectation of non-transitory, elevated energy prices. The Biden administration threatens to place price controls and export controls on oil and natural gas to limit “price manipulation” as mid-term elections loom. The sale of electric vehicles and hybrid vehicles boom as drivers seek to defray their rising gasoline bills.
6. Congress finally legalizes cannabis at the Federal level. The new bipartisan law removes cannabis from the Controlled Substances Act and expunges cannabis-related criminal convictions. The new law also makes it easier for U.S. entrepreneurs to start cannabis companies and for U.S. institutional investors to commit capital to existing cannabis companies. Banks trip over themselves as they try to establish banking relationships with the previously unbanked cannabis industry. Cannabis-related stocks in the United States more than double when the law is signed as a deluge of institutional capital flows into the sector. 
7. AMC and other meme stocks continue their fall from bubble levels, while value outperforms growth, as is often the case during inflationary environments. AMC’s share price declines by more than 90% from peak to trough. Other meme stocks, such as GameStop, experience a similar share price deflation. Many Reddit investors find themselves financially ruined by failing to diversify appropriately and by believing that investment fundamentals matter in the long-term less than hype and greater fool investment theories. Several Congressmen call for hearings to determine which companies are responsible for so many people losing so much money in these meme stocks.
8. Cryptocurrency and blockchain investments and applications continue to grow. The sector becomes more ingrained in the global economy and markets, against the wishes of policymakers at the U.S. Treasury, the Securities & Exchange Commission, the Federal Reserve, and the Internal Revenue Service. The SEC goes another year without approving an ETF that could buy and hold bitcoins while central banks accelerate their efforts to launch their own digital currencies. Institutional investors continue to test the waters with cryptocurrencies, slowly committing incremental capital to interesting projects. The price of bitcoin declines by more than 50% at some point in the year and also doubles at another point in the year. Bitcoin exits the year with a price above $50,000.
9. Republicans win back control of the Senate and Congress on campaign promises to tame inflation by reducing government spending. Republicans’ campaign promises are kept for less than 60 days until the stock market corrects again. Congress quickly puts together another aggressive fiscal stimulus bill to support the economy and the stock market. Alas, that is a story that will have to wait until 2023 to explore further.
10. Food prices surge during 2022. Due to extremely high fertilizer prices (see graph below of the price of urea), farmers worldwide decide not to plant crops on their marginal acreage in 2022, resulting in a shortfall of new grain supply at a time where inventories are already low. Rising food prices engender increasing social and political instability. The political instability begins in already-unstable Kazakhstan but spreads across other developing countries where food and energy-related expenditures represent a large proportion of household budgets. Governments respond to rising food prices with proposals for increasing food subsidies, which is helpful for short-term political prospects but terrible for containing rising food prices over the long term.

Making predictions might be interesting, but it doesn’t necessarily make you money because it’s impossible to predict the future. The best investors are those, like Warren Buffet, who do not try to time the market at all. They look to make long-term investments in mispriced, undervalued, and highly cash generative companies with excellent long-term fundamentals. And they try to keep enough cash (or gold) to take advantage of opportunities when they arrive.

Disclosure: This article is for informational purposes only and is not a recommendation of a particular strategy. The views are those of Adam Strauss as of the date of publication and are subject to change and to the disclaimer of Pekin Hardy Strauss Wealth Management. The Consumer Price Index (CPI) is an unmanaged index representing the rate of the inflation of U.S. consumer prices as determined by the U.S. Department of Labor Statistics.