Consider a flat year for stocks in 2022 a success
Skip to main content
  • Home
  • Economy
  • Stocks
  • Analysis
  • World+Biz
  • Sports
  • Splash
  • Features
  • Videos
  • Long Read
  • Games
  • Epaper
  • More
    • COVID-19
    • Bangladesh
    • Infograph
    • Interviews
    • Offbeat
    • Thoughts
    • Podcast
    • Quiz
    • Tech
    • Subscribe
    • Archive
    • Trial By Trivia
    • Magazine
    • Supplement
  • বাংলা
The Business Standard
TUESDAY, MAY 24, 2022
TUESDAY, MAY 24, 2022
  • Home
  • Economy
  • Stocks
  • Analysis
  • World+Biz
  • Sports
  • Splash
  • Features
  • Videos
  • Long Read
  • Games
  • Epaper
  • More
    • COVID-19
    • Bangladesh
    • Infograph
    • Interviews
    • Offbeat
    • Thoughts
    • Podcast
    • Quiz
    • Tech
    • Subscribe
    • Archive
    • Trial By Trivia
    • Magazine
    • Supplement
  • বাংলা
Consider a flat year for stocks in 2022 a success

Analysis

Jared Dillian, Bloomberg
02 January, 2022, 12:00 pm
Last modified: 02 January, 2022, 12:02 pm

Related News

  • World economy has 'buffer' against recession, says IMF's Gopinath
  • Washington in touch with Dhaka on newly launched IPEF
  • Asia stocks slip with US futures, euro holds gains
  • Stocks surge amid supportive measures
  • Stocks jumpstart after finance minister called for support

Consider a flat year for stocks in 2022 a success

Nobody should complain if stocks have very low or even no returns because there is the potential for something much worse

Jared Dillian, Bloomberg
02 January, 2022, 12:00 pm
Last modified: 02 January, 2022, 12:02 pm
This year will be tougher for the financial markets and the economy. Photo: Bloomberg
This year will be tougher for the financial markets and the economy. Photo: Bloomberg

In talking with a number of market players the last few weeks, there seems to be a broad consensus that 2022 is going to be more challenging than 2021, which almost makes me wonder if stocks will not be up another 20 percent this year, defying bearish expectations yet again. But things are a little different than this time a year ago.

For starters, the Federal Reserve is beginning the process of reversing its ultra-loose monetary policy. It is not moving fast enough relative to the inflation that was unleashed, but it is doing so in an environment where markets are increasingly sensitive to the potential for higher interest rates, due to the vast amounts of leverage in the system and the amount of government debt incurred in the last few years.

The Fed has not increased rates yet, and probably will not until March, but the yield curve has already flattened to a very slim 80 basis points, suggesting that we are moving ever-closer to a recession. 

I have been through a few yield-curve flattening cycles and every one is accompanied by a raft of dumb analyses. The first is the mechanics behind the measurements.

The convention is to use the difference in yields between two- and 10-year US Treasury notes, but there are some annoying purists that always come out of the woodwork and say that you should really use three- or six-month Treasury bill rates instead of two-year yields. Typically it takes longer for the curve to invert when bills are used as the benchmark, which gives people hope that a recession is further in the future than they think.

The second is the speculation that this time is different, and that maybe this particular flattening of the yield curve, or even an inversion, will not result in a recession. But the yield curve is the undisputed heavyweight champion of market indicators — an inversion always predates a recession.

It is just a matter of timing.  If the Fed stays on its current path — or accelerates — then it looks probable that the yield curve will invert sometime in early 2022, right around the time that the actual rate increases are forecast to start. Then the clock starts, as a recession can happen anytime over the next 18 months, going by the relationship between inversions in the yield curve and economic contractions.

The question then becomes how much will the stock market drop? Potentially a lot. Stocks were not particularly cheap before the pandemic, and there has been a lot of speculation and froth over the last 18 months or so.

For example, a 20 percent drop, the technical definition of a bear market, would only take the S&P 500 Index back to the beginning of 2021.

Investors also need to take the reaction function of the Fed into account. If the current high rates of inflation fail to recede, the Fed might panic and raise rates too far, too fast, triggering some type of crisis.

The Fed already erred in believing that faster inflation was transitory, and the risk that policymakers will make an error of the second type, overreacting and plunging the markets into chaos, is not zero.

If that was not enough, 2022 will bring the midterm US elections. Current polls would suggest that the Democrats are headed for a big defeat in Congress, with Republicans gaining control of the House.

A lot can change between now and November, but it is hard to see Democrats increasing their majority at this point. This has profound implications for fiscal policy.

Huge Republican gains in the 1994 and 2010 midterm elections resulted in six years of relative austerity under presidents Bill Clinton and Barack Obama. The result was a budget surplus at the end of Clinton's second term.

Fiscal spending was especially lean from 2010 to 2016, as the budget deficit shrank from around 10 percent of GDP to about 2 percent of GDP. Republicans are by no means fiscally conservative, but they are reliably so when they are in the opposition.

A Republican majority in Congress would probably result in the budget deficit dwindling from $3 trillion or more to less than $1 trillion. And since much of the current deficit consists of government transfer payments, the result would be far less consumer spending and a few percentage points less in GDP growth.

And since inflation has been driven mostly by loose fiscal policy, austerity has the potential to slow or stop inflation.

This year will be tougher for the financial markets and the economy. But nobody should complain if stocks have very low or even no returns, because there is the potential for something much worse.


Jared Dillian is the editor and publisher of The Daily Dirtnap, investment strategist at Mauldin Economics, and the author of "Street Freak" and "All the Evil of This World." He may have a stake in the areas he writes about.


Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.

Bloomberg Special / Features / Top News / World+Biz / Panorama / Global Economy

Global Stock Market / 2022 / stocks / Economy / World economy

Comments

While most comments will be posted if they are on-topic and not abusive, moderation decisions are subjective. Published comments are readers’ own views and The Business Standard does not endorse any of the readers’ comments.

Top Stories

  • Representative Photo: Pixabay.
    India to limit sugar exports in risk to global food prices
  • Muhammad Abdul Mazid, Former chairman, National Board of Revenue. TBS Sketch
    Revenue growth in FY22 only because import costs have surged
  • The road lanes of the Padma Multipurpose Bridge are scheduled to be inaugurated this year. Photo: Mumit M
    Padma Bridge to be opened to public on 25 June

MOST VIEWED

  • Muhammad Abdul Mazid, Former chairman, National Board of Revenue. TBS Sketch
    Revenue growth in FY22 only because import costs have surged
  • A Russian army service member fires a howitzer during drills at the Kuzminsky range in the southern Rostov region, Russia January 26, 2022. REUTERS/Sergey Pivovarov/File Photo
    3 months of Ukraine war : Miscalculations, resistance and redirected focus
  • Why we must resist geoeconomic fragmentation—and how
    Why we must resist geoeconomic fragmentation—and how
  • Asia’s blistering heatwave has caused hours-long daily blackouts, putting more than 1 billion people at risk. Photographer: Aamir Qureshi/AFP/Getty Images/Bloomberg
    A hot, deadly summer is coming with frequent blackouts
  • Illustration: TBS
    ‘The move to introduce DVS has changed the entire spectrum of financial auditing’
  • Anthony Albanese, leader of Australia's Labor Party, addresses supporters after incumbent Prime Minister and Liberal Party leader Scott Morrison conceded defeat in the country's general election, in Sydney, Australia May 21, 2022. REUTERS/Jaimi Joy
    New Australian govt looks to SE Asia as it deals with 'difficult' China relationship

Related News

  • World economy has 'buffer' against recession, says IMF's Gopinath
  • Washington in touch with Dhaka on newly launched IPEF
  • Asia stocks slip with US futures, euro holds gains
  • Stocks surge amid supportive measures
  • Stocks jumpstart after finance minister called for support

Features

The balcony railings of the Boro Sardar Bari in Sonargaon. Made of cast iron, these railings feature vertical posts with intricate designs on top. Photo: Noor-A-Alam

The evolution of railing and grille designs

6h | Habitat
A Russian army service member fires a howitzer during drills at the Kuzminsky range in the southern Rostov region, Russia January 26, 2022. REUTERS/Sergey Pivovarov/File Photo

3 months of Ukraine war : Miscalculations, resistance and redirected focus

7h | Analysis
Musk is denying the sexual harassment allegation that surfaced this week. Photo: Bloomberg

Elon Musk’s crazily banal week 

1d | Panorama
Asus Zenbook 14 Flip OLED: A touch of brilliance to your life

Asus Zenbook 14 Flip OLED: A touch of brilliance to your life

1d | Brands

More Videos from TBS

Effect of commodity price hike on lower income people

Effect of commodity price hike on lower income people

2h | Videos
The story of an 8 thousand gramophone records collector

The story of an 8 thousand gramophone records collector

3h | Videos
How to maintain a good relationship with colleagues

How to maintain a good relationship with colleagues

7h | Videos
Why are Duranta TV shows popular?

Why are Duranta TV shows popular?

21h | Videos

Most Read

1
Tk100 for bike, Tk2,400 for bus to cross Padma Bridge
Bangladesh

Tk100 for bike, Tk2,400 for bus to cross Padma Bridge

2
A packet of US five-dollar bills is inspected at the Bureau of Engraving and Printing in Washington March 26, 2015. REUTERS/Gary Cameron
Banking

Dollar hits Tk100 mark in open market

3
Bangladesh at risk of losing ownership of Banglar Samriddhi
Bangladesh

Bangladesh at risk of losing ownership of Banglar Samriddhi

4
PK Halder: How a scamster rose from humble beginnings to a Tk11,000cr empire
Crime

PK Halder: How a scamster rose from humble beginnings to a Tk11,000cr empire

5
BSEC launches probe against Abul Khayer Hero and allies
Stocks

BSEC launches probe against Abul Khayer Hero and allies

6
The reception is a volumetric box-shaped room that has two glass walls on both the front and back ends and the other two walls are adorned with interior plants, wood and aluminium screens. Photo: Noor-A-Alam
Habitat

The United House: Living and working inside nature

The Business Standard
Top
  • Home
  • Entertainment
  • Sports
  • About Us
  • Bangladesh
  • International
  • Privacy Policy
  • Comment Policy
  • Contact Us
  • Economy
  • Sitemap
  • RSS

Contact Us

The Business Standard

Main Office -4/A, Eskaton Garden, Dhaka- 1000

Phone: +8801847 416158 - 59

Send Opinion articles to - oped.tbs@gmail.com

For advertisement- sales@tbsnews.net

Copyright © 2022 THE BUSINESS STANDARD All rights reserved. Technical Partner: RSI Lab