Economic Insights for January and February 2022: A Record Worth Checking against What Happened

The following were the economic insights for January and February 2022.

A surge in COVID-19 cases hit Europe and the US, compounded by the new Omicron variant, which the WHO has classified as a variant of concern.  Markets hate uncertainty, and this muddied the path back to pre-COVID conditions.  Omicron’s economic impact had not yet peaked.  Cases were still rising globally.  Higher vaccination rates and effective measures against a less deadly variant had already let markets largely sideline the initial shock.

A baseline path for many economies pointed to a stuttering, start-stop pattern of Covid waves, delaying recovery in several markets.  Countries easing restrictions faster than their pandemic management justified were not helping.

The Inflation Story, as It Stood

Inflationary pressure in developed markets pushed the Federal Reserve toward anchoring expectations, forcing a hawkish tilt faster than markets had anticipated.  Supply chain bottlenecks and strong demand for manufactured goods kept inflation rising.  The global logistics industry had not prepared for the surge in goods demand since mid-2021, creating delays at ports and border crossings, the direct cause of the inflation at the time, expected to ease as production caught up.

Rebalancing recovery between goods and services was the prerequisite for easing these bottlenecks in 2022, contingent on how the pandemic evolved, with no definitive scenario available.  Persistent high inflation was becoming a genuine concern for a growing number of central banks, pushing several toward tightening.  China stood apart, with moderate inflation and an easing bias, though sentiment toward Chinese equities had not turned bullish, weighed down by structural and regulatory change and over-leveraged corporations.

Monetary Policy, as Projected

High inflation and tight labour markets dominated the policy debate.  Normalisation accelerated through late 2021, with several central banks announcing hikes or cutting asset purchases.  The Federal Reserve had begun tapering.  Market pricing pointed to faster normalisation through 2022, likely bringing a federal funds rate hike as early as June, with a preference for earlier action before inflation risked turning hyperinflationary in some markets.  Hawkish tones from the Federal Reserve’s January meeting left markets uncertain on timing and magnitude, with participants already weighing quantitative tightening once tapering finished in March.

The Portfolio View at the Time

Staying invested in equities had been the optimal strategy since the March 2020 correction, and the view heading into 2022 favoured risk assets over government and corporate bonds, and over low-yielding cash.  The inflation-driven correction was expected to prove temporary, with a rebound to follow.  Above-trend growth across major developed economies was expected to persist at least through the first half of 2022, supporting earnings momentum, with fund managers expected to overweight US and developed-market equities while favouring emerging markets less, given Federal Reserve tightening, China's regulatory recalibration, and the risk of stronger dollar outflows.

Strong free cash flow and low corporate defaults were expected to keep credit spreads tight, though rising rates could still hurt bond price performance.  Asian credit was preferred over US credit, given the spread premium available, against a backdrop of central banks in the West and East moving in different directions.

Checking This Against What Actually Happened

The Russia-Ukraine war began on 24^th February 2022, weeks after this report, a shock no forecast written in January could have priced in, and one that drove energy and commodity prices sharply higher, compounding the inflation problem this report already flagged.  Inflation did not ease as supply chains caught up.  It kept climbing, forcing the Federal Reserve into four consecutive 75 basis point hikes across June, July, September, and November, pushing the federal funds rate to 4.25 to 4.50 per cent by year-end, a more aggressive path than the single June hike this report anticipated.

The equity call did not hold.  The S&P 500 fell roughly 19 to 20 per cent across 2022, its worst year since 2008.  Bonds fell alongside equities in the same year, a rare joint collapse across both asset classes that punished the traditional balanced portfolio this report's own allocation logic assumed would still provide ballast.  China’s own equity caution proved the more accurate call in that section.  Sentiment never turned bullish.  Shanghai’s lockdown in April and May 2022, continued regulatory pressure, and a deepening property crisis kept Chinese equities under pressure through the year.  A single geopolitical shock quickly invalidated even a well-reasoned baseline.  The assumption that markets would simply absorb inflation and rebound was the single costliest call then.

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Terence Nunis | Executive Chairman, Equinox Zenith | Author, The 1% Playbook: The Billionaire Cheat Code