Oppenheimer logo banner header

Fed Pivot, Inflation to Color 2022 Markets

A shift in central bank policy and rising consumer prices pose palpable risks to the recovery but strong economic growth and higher corporate earnings could offset volatility in the coming year.

Muted Response
Opportunities Overseas

Asset Class Detail

Global Equity

  1. U.S. Large Cap

    Sizeable outperformance, driven by a few mega-cap growth stocks, has stretched valuations. Solid earnings and economic growth remain tailwinds but absolute performance should be more muted. As financing becomes more costly, the market will shift focus to company fundamentals. Higher rates should have a deeper impact on growth stock valuations, especially unprofitable companies with high valuations. Long/Short Equity strategies can exploit performance dispersion stemming from potential central bank actions but macro uncertainty may persist.

    Current View: Slightly Positive

  2. U.S. Small Cap

    Valuations remain slightly higher than historical averages but not as extended as large caps. Small caps could benefit from the return of the cyclical trade but are likely to remain volatile given inflation and pandemic concerns. Fundamentals should remain paramount and unprofitable small-cap stocks may remain under pressure if interest rates continue to rise.

    Current View: Slightly Positive

  3. Non-U.S. Developed

    International equities posted positive returns but lagged U.S. stocks. Non-U.S. stocks are trading at historical discounts compared to U.S. equities and look reasonable compared to their own history. Attractive valuations and a strong earnings outlook suggests mean reversion and relative outperformance in 2022. Be wary of downside risks such as Covid-19 variants, inflationary pressures and central bank policy moves.

    Current View: Slightly Positive

  4. Emerging Markets

    Valuations remain reasonable relative to most developed markets and their own history. The discount relative to U.S. stocks is notable. Still, the pandemic and economic recovery vary greatly from country to country and could spur continued performance dispersion. Active management should help navigate slowing growth, increased regulation in China and recoveries in other emerging markets.

    Current View: Slightly Positive

Global Debt

  1. Core Bond

    Treasury yields were volatile due to persistent inflation concerns and the Fed’s hawkish pivot. We expect rates move higher over the intermediate-term as the Fed likely remains hawkish and growth remains above trend. Conservative investors should maintain exposure to core bonds to lower volatility, but investors requiring current income above inflation could supplement with investment-grade bonds, high-yield bonds or dividend-paying stocks.

    Current View: Slightly Negative

  2. Investment Grade

    Investment-grade spreads widened modestly but remain tight and yields are low relative to history. Although corporate fundamentals have improved significantly, tight credit spreads leave little room for appreciation and rising rates will create a challenging environment.

    Current View: Slightly Negative

  3. High Yield

    Spreads widened but remain tight relative to historical averages. However, fundamentals have significantly improved and default rates are very low. High yield provides more attractive yields and carries less duration risk than investment-grade bonds but effective active management is key.

    Current View: Neutral

  4. Non-U.S. Developed

    Interest rates overseas are modestly higher year-to-date but non-U.S. sovereign debt yields remain unattractive relative to U.S. Treasuries. Many foreign central banks are expected to remain accommodative in 2022 and non-U.S. corporate bonds provide lower yields than U.S. corporates, but fundamentals continue to improve.

    Current View: Slightly Negative

  5. Emerging Markets

    Emerging market debt—government and corporate—offers much higher absolute yields relative to the rest of the world. However, economic growth and pandemic recovery remain idiosyncratic across developing countries and are likely to lead to divergence in performance. Local currency denominated debt may be a prudent hedge for dollar exposure.

    Current View: Slightly Positive

Diversifying Strategies

  1. Real Assets

    Real assets—specifically REITs and MLPs—posted strong outperformance in 2021. But the valuation gap from a year ago has largely disappeared. REITs are no longer undervalued relative to other equities. And while MLPs are still trading at slight discounts relative to history, they don’t offer the same upside as a year ago. Both asset classes may outperform if inflation persists but it’s unlikely that we’ll see the same level of outperformance witnessed in 2021.

    Current View: Slightly Positive 

  2. Macro

    Macro strategies struggled in 2021 due to volatility and uncertainty. In 2022, a more hawkish Fed may provide attractive opportunities but volatility remains.

    Current View: Neutral

  3. Event Driven

    Event-driven strategies performed well in 2021 on strong deal flow and we expect M&A activity to moderate if interest rates rise. But with strong balance sheets and stock prices, deal activity could remain robust and spur opportunities.

    Current View: Positive