Our 2022 Outlook is Cautiously Optimistic
Our base-case scenario is that the pandemic recedes (but doesn’t disappear), the global economy slows but still grows above trend, corporate earnings growth slows but is still solid, the U.S. rate of inflation remains elevated but is falling, and U.S. interest rates rise moderately.
That would be a positive scenario for the economy and global equity and credit markets, although not for the core bond market. But even in the best case, it likely won’t be a smooth journey: The pandemic remains uncontained, domestic and global political and social tensions are elevated, the risks of an economic policy mistake have risen, and any number of unpredictable bumps in the road or worse may occur. And were we to see a sharply inflationary environment it would undoubtedly be damaging for both stocks and bonds, as interest rates rise and equity market valuations fall.
All these considerations (and more) factor into our analysis and current tactical portfolio positioning.
We would benefit in the base case but our portfolios are also strategically balanced and well-diversified. We believe they would be resilient should a shock outside our base case occur.
Our fixed-income positioning reflects the poor return outlook for the core bond index. Our active, flexible fixed-income managers have a strong likelihood, in our view, of outperforming the index without taking imprudent risks. But we still maintain a meaningful core bond allocation in our more conservative balanced portfolios as ballast in the event of a recessionary scenario, which would hurt flexible, credit-oriented bond funds as well as stocks.
Finally, our allocations to marketable alternatives are largely a substitute for some fixed-income exposure. We believe these positions may offer better return prospects plus beneficial diversification across a range of scenarios beyond a traditional recession where core bonds shine.
As always, we thank you for your trust, and we welcome questions you may have about the investment landscape or your portfolio.
About Karl Frank: