DJ30: Roping the Bull

We’re closing in on the end of 2021—another year in the bull market that never seems to end. Once again, the question of whether the Dow will crack is uppermost in the minds of retail investors. Are prices finally going to reach levels that can’t be justified by fundamentals, valuations or even outright irrational exuberance?

There are many reasons to be optimistic: the global economic recovery is moderating but still on track, earnings are catching up to share prices and profitability is forecast to top pre-pandemic levels—all of which suggests it’s too early to abandon stocks. Bloomberg Intelligence’s fair-value model implies a return of about 8% from equities next year.

The major doubt looming over stock markets, however, is inflation. Bloomberg’s global inflation index is at its second-highest point in the past two decades, and the U.S. has the worst inflation (relative to its history) of any broad region in the world.

While the Dow has generally done well in inflationary environments, inflation has breached the 90^th percentile, and when that happens returns have historically tailed off dramatically (2.4% versus the average annualized 8.9%). U.S. stocks are already at the bottom of the global scorecard in the final quarter of 2021. While the flood of retail investor confidence shows no immediate sign of abating, many analysts are becoming more cautious.

Broadly, analysts are more optimistic for other developed and emerging-market equities than they are for the Dow. Slowing growth rates may threaten earnings, the U.S. market remains expensive compared with global peers, and persistent inflation raises the prospect of interest-rate increases coming faster and earlier than expected.

“The reality of margin pressure and the fear of rising rates to combat inflation are likely to keep markets on edge moving into 2022,” said Marc Despallieres, Chief Strategy Officer at multi-asset broker Vantage. “Similar fears have wilted the bull market many times over the course of this extended run but so far it hasn’t been broken, not even by a global pandemic.”

With a keen understanding of the uncertainty that investors have to navigate in the new year, Vantage has made significant upgrades to its technology. This includes improvements to its app, such as an enhanced interface, access to daily market analysis and localised payment solutions for the benefit of its users, particularly in emerging markets, according to Despallieres. By simplifying and enhancing the trading experience, Vantage enables investors to focus on the challenges and opportunities. Nowhere will that be more important than with oil and gold.

“The reality of margin pressure and the fear of rising rates to combat inflation are likely to keep markets on edge moving into 2022.”

– Marc Despallieres, Chief Strategy Officer, Vantage

Oil Markets: A Return to Balance

As the world’s most-traded commodity, oil is the linchpin of the global economy. After a tumultuous 2021, when Brent crude futures shot up 67% from the start of the year, the question of whether prices will continue climbing in 2022 is at the forefront of investor’s minds.

The prospects for oil look bullish early next year as the world’s economies continue to recover from pandemic disruptions. Any gains may be tempered later in the year, however, as the world’s major producers including the U.S. raise output. That will bring supply and demand back into balance after global output failed to keep pace with demand in 2021.

The U.S. Energy Information Administration (EIA) forecasts global oil supply will rise to 99.9 million barrels per day (bpd) in the first quarter of 2022, just above demand of 99.8 million bpd. If that happens, it will reverse the imbalance in the fourth quarter of 2021, when demand (100.1 million bpd) was greater than production (99.4 million bpd).

Increasing demand will support higher prices though supply will catch up over the course of 2022.

The EIA predicts that by the fourth quarter of 2022, demand will surge to 101.6 million bpd, above pre-COVID-19 levels, and supply will rise accordingly to 102.5 million.

With fundamentals in such a tight balance, some analysts are predicting that Brent crude futures, the European benchmark, may surge to $90 a barrel or higher by the beginning of 2022, and may push to $110 a barrel in the first quarter of next year.

This will likely act as a signal to the market to regain balance, which in turn will moderate prices. Goldman Sachs, for example, expects Brent to average $80 a barrel during the second half of 2022, which is still higher than the current prices for the December 2022 future contract.

“Oil’s bull run looks set to continue in 2022 as consumers take advantage of easing COVID-19 movement and border restrictions to drive and fly more,” said Despallieres. 

“Brent CFD trading demand picked up significantly this year within the Vantage group, and the expected global economic growth next year will underpin oil demand even as Middle Eastern producers raise output and flows from U.S. fields increase.”

– Marc Despallieres, Chief Strategy Officer, Vantage

Precious Metals: Another Push for 2K?

After surging through $2,000 an ounce in the initial months of the pandemic, gold has been on a long and meandering decline ever since, while industrial metals like copper and other commodities powered ahead.

The global economic recovery is widely expected to moderate in 2022 and many analysts forecast that commodity prices will start reverting to their historical means, which in this case means prices will drop. Gold, however, may be the exception.

Bloomberg Intelligence analysts believe 2022 will see a reverse in the trend of declining precious metals and rising industrial metals, and gold may be poised to “steal the show” and stage another push through $2,000. Technical charts suggest gold prices are holding at a key level of $1,700 and are poised to move higher. Despite recent weakness, prices haven’t given up gains from early in the pandemic.

That will depend on a number of variables. Gold prices were strongly influenced by monetary policy in 2021 and investors will continue monitoring Fed movements through 2022. If monetary policy remains accommodative in the current inflationary environment, then gold is likely to gain. If the Fed responds by raising interest rates, this may dampen enthusiasm for the yellow metal.

Another variable will be crude oil. Historically, oil prices and gold have moved in opposite directions. If oil pushes beyond $90 and onwards through $100 we are likely to see gold held back, but if the crude rally stalls below $90 and pulls back, analysts think this will be positive for gold.

The great unknown is, of course, global stability, where factors such as the emergence of the new Omicron variant could be a cause of concern. Throughout modern history (since the end of the Gold Standard), investors have responded to major crises by flocking to gold as a safe haven. Crises are by their nature unpredictable, so any investors looking for trigger points to buy gold would always be advised to hold some “dry powder” in the form of cash to be ready for any surprise opportunities.

This article was first published on Bloomberg.
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