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The ongoing COVID-19 pandemic dominated headlines in 2021; however, most global stock markets shrugged off the news and ended the year strongly positive. While even seasoned investors may find this irrational, it’s important to remember as we move into 2022 that stocks don’t view world events as absolutely good or bad, like people do.

Markets are forward-looking. They incorporate and pre-price all widely known information and opinions, then weigh against actual results. As such, 2021′s reality was simply better than feared, fuelling a supercharged bull market year.

Fisher Investments Canada believes the current bull market will continue in 2022, although it will likely unfold differently. We see a higher probability than usual of flat or slightly negative returns through the first half of the year as U.S. political uncertainty and campaign rhetoric leading up to midterm elections weigh on investor sentiment. After summer, though, we expect a strong second half that ultimately delivers overall gains for 2022.

U.S. politics

Understanding the global impact of the U.S. economy and U.S. stock market drivers is important for investors, since U.S. stocks make up nearly two-thirds of the global market.

This year marks President Biden’s second year in office. Historically, the second year of a president’s term has often been a turning point because of midterm elections.

In the U.S. political cycle, all 435 seats of the House of Representatives and about a third of Senate seats come up for election during the second year of a president’s term. The president’s party often loses Congressional seats during these midterm elections, which brings increased potential for party-line gridlock.

Democrats’ Congressional edge is already near-zero, the party’s smallest advantage in over 100 years. Come November, even the smallest Republican gains could give that party control of the House at a minimum, maybe even the Senate. Either situation creates hard-core gridlock and ushers in a government incapable of passing big legislation. Gridlock also brings relatively few big legislative changes – something stocks love.

As midterms approach, we believe stocks will begin pre-pricing the ensuing gridlock, which should spark a strong late-year rally. This is common during mid-term election years. Confirmation bias causes everyone to doubt this ever happens, so it often reappears like magic.

As always, we are politically agnostic. We prefer no party, nor any politician. We assess political events for their potential economic and market impact only.

Ebbing inflation

Fisher Investments Canada believes global inflation will ease throughout 2022. We believe the current primary fundamental driver of rising prices – supply constraints – will likely subside sooner than most expect.

Rising prices dominated headlines throughout 2021, with inflation surging first in the U.S., then Europe. It remains elevated today in the U.S., the U.K., Canada and Europe, and we don’t dismiss the pain of higher household costs. However, the math underpinning inflation measures says, all else being equal, inflation rates should decelerate in 2022′s second half.

In 2020, COVID lockdowns and supply shortages drove prices lower. These higher prices during the first half of 2021 skewed many readings of year-over year inflation rates. During 2022, though, those lower-than-normal 2020 prices will begin to exit the inflation equation, meaning the year-over-year rate will slow.

Even if inflation sticks around, higher prices aren’t automatically a bearish signal for stocks, especially early on. Consumers don’t like to hear it, but companies can largely adjust and pass on costs to support profits – one reason why stocks are often a hedge against rising prices, as they were in 2021.

Portfolio positioning

Growth stocks, which normally outperform late in a market cycle, did well in 2021 despite widespread belief that value stocks should dominate. Fisher Investments Canada believes the current bull market is acting as if it is late stage, even though it began just 23 months ago.

Late-stage bull markets favour growth stocks over value stocks. An emphasis on high-quality growth stocks in tech and tech-like industries, luxury goods, industrial automation and others should prove beneficial in this environment. Importantly, these types of stocks also provide abundant liquidity if a bear market is in the offing and exiting stocks becomes a consideration.

With that said, we think a bear market is likely further out than we anticipated a year ago. In early 2021, sentiment was quite optimistic. Some smaller, speculative segments of equities even flirted with investor euphoria, which often accompanies market peaks. However, around mid-2021, the exuberance faded amid mounting fears including the Delta variant, inflation’s surge, flaring geopolitical tensions and more. Now sentiment is bending toward scepticism.

Therefore, while we expect markets to grind in 2022′s first half, this isn’t a reason to get out of stocks. Fisher Investments Canada believes absent a good reason to be bearish, it is vital to be bullish. The early part of 2022 will likely require patience from investors, with most of the upside beginning around midyear. We often tell investors, “It is time in the market that matters, not timing the market.” That statement rings particularly true at the beginning of 2022.

Investing in stock markets involves the risk of loss and there is no guarantee that all or any capital invested will be repaid. Past performance is no guarantee of future returns. International currency fluctuations may result in a higher or lower investment return. This document constitutes the general views of Fisher Investments Canada and should not be regarded as personalized investment or tax advice or as a representation of its performance or that of its clients. No assurances are made that Fisher Investments Canada will continue to hold these views, which may change at any time based on new information, analysis or reconsideration. In addition, no assurances are made regarding the accuracy of any forecast made herein. Not all past forecasts have been, nor future forecasts will be, as accurate as any contained herein.

This content was produced by Fisher Investments Canada. The Globe and Mail was not involved in its creation.