2022 Outlook: Stocks, Bonds, and More

After living through more than two years of COVID-19, its variants, and the attendant supply-chain disruptions and inflation concerns, one thing is clear: Uncertainty is the only certainty.

We sat down with three Schwab experts to discuss their outlooks for U.S. stocks, international stocks, and bonds—with an eye toward actions investors might take in the year ahead.

U.S. stocks

The outlook: The S&P 500® Index ended 2021 up 27%—but that impressive gain belies a roller-coaster year. “More than 90% of the stocks in the S&P 500 experienced losses of 10% or more at some point in 2021,” says Liz Ann Sonders, Schwab’s chief investment strategist. This kind of churn under the market’s surface could persist in 2022, given the myriad macroeconomic forces at play.”

Perhaps the most pronounced of these forces is inflation, which in recent months has reached highs not seen since the 1980s. “Demand for goods—combined with pandemic shutdowns and supply-chain upheavals—has been the primary driver of inflation,” Liz Ann says. “These bottlenecks are expected to ease, but as we’ve learned, new COVID-19 variants could slow or curtail such progress.”

Inflation will also influence the Federal Reserve, which helped keep the economy afloat during the depths of the pandemic by slashing interest rates and increasing its bond purchases. The Fed has signaled it will end its bond-buying program and begin raising interest rates as early as the first half of this year, but persistent inflation pressures could accelerate the pace of both actions (see “Bonds,” below).

“Historically, stocks have performed better when the Fed has increased interest rates slowly in the first year of rate hikes,” Liz Ann says. “Faster rate hikes, on the other hand, have historically been accompanied by weaker returns.”

Easy does it

Stock market performance has historically benefited from a slower approach to rate hikes in the first year of a new rate-hike cycle.