2021 was not an easy year for investors to navigate. With political unrest in the wake of the previous year’s election, a pandemic that kept wide swathes of the economy closed down and disrupted supply chains, and the alarming start of inflationary prices, it was hard to find good bets for investing money and earning a return.
However, despite the challenges, many investors ended last year in the black; the S&P returned 26.89 percent in 2021, and the Down Jones Industrial Average finished up over 18 percent by the end of the year, too.
Cryptocurrencies came into their own last year as well, with more people (and even some governments) beginning to adopt and use them. However, knowing when and which ones to buy and sell will be more important in the years ahead.
2022 is shaping up to be equally challenging with ongoing inflation and geopolitical fears to contend with. Once again investors will have to carefully avoid pitfalls and find opportunities for solid returns as well.
Here are four trends you need to understand to invest wisely in 2022 and beyond.
Inflation isn’t Going Away
While inflation was initially dismissed as a short-term anomaly last year, it isn’t going away any time soon. In fact, many economists now assess inflation as the primary economic challenge of 2022.
This should not be surprising; a combination of high consumer demand, supply chain issues, COVID-19 and Russian aggression in the Ukraine disrupt energy and other critical markets, all of which are causing prices to soar ever higher.
In 2022, expect rising prices to roil markets and compel investors to make hard decisions about the assets they hold.
While some financial analysts expect inflation to decline steadily throughout this year, they were wrong about it last year; other experts warn of inflation becoming more durable and lasting for several years which could eventually lead to stagflation.
The Fed had been expected to raise rates this year, and steady inflation has made that likelihood a near certainty; Chairman Jerome Powell recently indicated that the central bank would initiate a quarter point percentage hike later this month. This is likely the start of several quarter percentage rises over the next eighteen months.
High prices and rising interest rates could make the stock market less appealing for investors in 2022 and 2023. Instead, many may watch for rising yields on bonds in the new inflationary economy and find the bond market a more attractive bet.
However, while bond yields may rise over the next year or two, they have only seen modest gains since prices started rising last year. Additionally, it is important to note that while rising interest rates often lead to higher yields on various savings accounts, most analysts doubt this will occur this year, and will be modest at best in 2023.
After two years of the Covid-19 pandemic, banks are flush with the cash consumers and businesses could not spend, and don’t really need to compete for it by raising their rates.
Based on the above, investing in the US stock market seems the way to go for the next couple of years given the strength of the local consumer, slowdowns in Europe and Asia due to the Ukrainian invasion and fallout (discussed further below).
Look at consumer and leisure/travel related stocks that benefit from and big tech (Google, Apple, Microsoft). Energy prices will likely stay high so pick an energy fund (XLE) or large cap producer stocks (Chevron). Finally, if interest rates do rise more than expected consider large bank stocks.
A Rise in Responsible Investing
Throughout 2022-23, expect to see investors increasingly searching for investments that support better environmental and social governance (ESG), and overall responsible business and government activities.
A recent study found that about one in three consumers made purchasing decisions based on their impact on climate and the environment. Concern for the environment is driving individuals and large wealth funds alike to pursue sustainable investing practices and focus on companies’ ESG practices as much as their balance sheets.
Similarly, as Russia continues its invasion of Ukraine and further threatens Eastern Europe, expect to see a disinvestment from businesses and financial activities related to Russia, Vladimir Putin, and the Oligarchs who support him. Already, key trading indices are delisting Russian stocks and other securities, and some oil and media companies are pulling their operations out of Russia altogether.
Investors looking to pursue a more socially responsible investment path have many options. Beyond their own research into the ESG activities of publicly traded companies to buy shares of, they can invest in funds such as the Vanguard FTSE Social Index Fund (VFTAX), the Shelton green Alpha Fund (NEXTX), the iSharesGlobal Clean Energy ETF (ICLN) or any of the other funds designed to support more sustainable investing.
Embracing Alternative Digital Investments – Cryptocurrencies, NFTs and Decentralized Finance (DeFi) Made Simple
Volatility in the market arising from inflation, global crises, and Covid-19 will continue to impact how people and institutions invest their money. Throughout 2022 and 2023, you can expect to see more of both groups allocating assets in less traditional investments.
Soaring growth in cryptocurrency investments is clearly indicative of this trend. An estimated 220 million people globally are now using cryptocurrency, as are companies and financial institutions, and investors are increasingly embracing digital currencies as a new frontier to pursue returns on their money. Institutional investors traded over $1.1 trillion of cryptocurrencies on Coinbase last year alone.
Investors seeking to pursue this trend have several options. First, they could use Coinbase or other platforms and buy and sell cryptocurrencies directly. Alternatively, there are several cryptocurrency ETFs available to invest in as well, such as ProShares Bitcoin Strategy ETF (BITO), Valkyrie Bitcoin Strategy ETF (BTF), Bitwise 10 Crypto Index (BITW), and many others, which enable investors to benefit from the surge in cryptocurrency adoption without actually having to hold and trade any of them.
For more advanced users investing in cryptocurrency is also a gateway to more advanced digital investing like Non Fungible Tokens (NFT), which allow users to purchase the ownership rights to digital images or characters. There is also the whole arena decentralized finance (DeFi) which allow investors to invest in new coins or “stake” their existing investments for higher than usual interest rates (yield farming).
While it will get easier and easier to invest in cryptocurrencies and related areas in 2022 and 2023, investors should be mindful of the massive volatility regarding digital currency. Bitcoin, one of the most popular and well-known cryptocurrencies, lost 30 percent of its value in a single day last year. Investors with a low risk tolerance should definitely take heed and proceed cautiously when it comes to cryptocurrency.
Don’t Forget the COVID-19 Coronavirus
Governments and the general public last year thought the end was in sight for the COVID-19 pandemic, as Delta variant cases declined, vaccinations surged, businesses reopened, and kids returned to school. Hopes were dashed when the Omicron variant emerged, however, and cases surged, putting stress on hospitals and healthcare providers around the world once again.
While the United States and Europe have emerged from the Omicron surge, people, especially investors, wonder if and when the next variant will emerge and further impact the economy. Lingering uncertainty about Covid-19 clearly continues to drive the markets, and shrewd investors must take this into consideration in 2022 and 2023.
Covid-related supply chain issues will continue to hamper many businesses throughout 2022, particularly smaller companies who rely on tight price margins to compete. Worker shortages due to the pandemic’s impact on the labor force will also affect many companies and contribute to supply chain problems and rising prices as well.
Investors should take these factors into consideration when making decisions about publicly traded companies to invest in; labor and supply chain issues could be critical factors determining profit or loss in many industry sectors.
Additionally, if another Covid-19 variant leads to increased infections, hospitalizations and further impacts the economy, investors should consider holding on to otherwise solid stocks and other investments that take an immediate hit, and look for safe havens for any additional finds, such as ETFs designed to mitigate the impact of the pandemic.
Parting Thoughts: Investing Challenges and Opportunities Abound in 2022 and 2023
While the uncertainty we have grown accustomed to during the past two years will continue, investors will nonetheless enjoy many opportunities to seek and earn favorable returns on their investments in 2022 and 2023.
While rising prices, global instability and the lingering pandemic remain formidable obstacles, none of them are insurmountable. Shrewd investors who remain mindful of risks and aware of economic trends will be able to avoid these obstacles and realize a return on their investments this year and beyond.