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Stock market: The main theme for 2022 ‘will be that of moderation,’ strategist says

Edward Jones Investment Strategist Angelo Kourkafas joins Yahoo Finance to discuss the economic and corporate fundamentals underpinning the market outlook for 2022.

Video Transcript

- Well, we want to continue the market's discussion with Angelo Kourkafas, Edward Jones Investment Strategist-- excuse me, strategist. And Angelo, thank you for joining us here today. We got some hotter-than-anticipated economic data out earlier, that would be GDP, and also consumer confidence. I'm just wondering what you're making of this data.

ANGELO KOURKAFAS: Yes, thank you for having me. Today's data, in our view, provides some evidence that the economy is ending the year with a positive momentum. Consumers were more upbeat in December, looking at consumer confidence, which should provide further support to spending. With also buying plans for autos and homes increasing, and also consumers are more confident. They have an improved outlook about their employment prospects. We think employees, workers appear to have the upper hand, with a record number of job openings, actually more than the number of unemployed and jobless claims declining to historically very low levels.

- And then Angelo, I want to look ahead. What do returns look like to you on the equity side heading into next year as we start normalizing?

ANGELO KOURKAFAS: Yes, we think we're still going to continue to see very strong consumer and corporate fundamentals. But it's not all going to be sunshine and rainbows next year for the markets. We think that the main theme for next year will be that of moderation. The economy and earnings, corporate earnings, will continue to expand once again but at a more moderate pace. And I think that moderation in combination with the Fed removing some of its liquidity and normalizing policy, that probably means more volatility and more frequent pullbacks than we have seen. But all in all, the expansion, the bull market continues. There's plenty of mileage left in our view, just returns, moderates, and pullbacks become more frequent.

- And Angelo, I want to ask you about your projection for what the Fed is going to do next year and compare it with a guest that we had on an hour ago from Mizuho who had a very contrarian opinion. He expects the economy to roll over somewhat in Q1, Q2 next year and that the Fed won't raise rates at all. They'll just stand pat. They'll do the taper. I'm just wondering, is this a possibility in one of your scenarios? And how likely do you see that?

ANGELO KOURKAFAS: Certainly with all the uncertainty on the public health front with Omicron, that is a possibility if the worst case scenario materializes. But our best case is that we are going to see interest rate hikes next year, probably three, as the policymakers have penciled in. Growth, we expect growth to remain above trend in terms of GDP growth, certainly above potential, which is between 1.5% to 2%. We think it's going to be in the range of 3% to 4%. So in that scenario of still improving labor market, declining unemployment, and above-trend growth, the Fed has some room to hike rates without derailing the expansion and bull market.

- And Angelo, I want to ask you, what signal are you getting from the bond market right now? The 10-year yield isn't doing anything at the moment. And I'm wondering, how do you implement that into your forecasting for next year then?

ANGELO KOURKAFAS: Yes. We have seen yields remain very low, even though on a calendar year basis we have seen a moderate rise but still at very low level, especially in real terms when you consider inflation. We think as economic growth continues, the expansion continues, as inflation moderates but remain at historically high levels through 2022, there is some more upside on the 10-year, probably towards the 2% range. But that, again, provides that we're going to see clearing of the uncertainties in the health care front. We think that bonds will continue to provide the diversification benefits that they have had. We expect, as I mentioned, more frequent pullbacks. And bonds is a core holdings, even with an outlook for moderately rising interest rates.

- I want to ask you about what kind of sectors you're looking at for the new year. And if I can draw everybody's attention to the Wi-Fi interactive, I have our sector heat map. And it's set on a month-to-day basis. So in December, we're seeing a lot of defensiveness. We're seeing health care that's XLV up over 6% along with staples. Utilities have been surging, real estate, but those are the defensive sectors. I'm wondering what you're expecting in the new year.

ANGELO KOURKAFAS: Yes, you are correct. We have seen a defensive tilt in December. At the same time, as the news about the new variant broke, which is a reminder that the path of the economy is still shaped by the path of the virus, for next year we think that the value investments are still likely to continue to benefit from above-trend growth. But so far this year, even after the December pullback, cyclicals have outperformed defensives by quite a bit and are historically at the high end of their last 10-year range. So for next year, we do expect a more balanced performance between cyclicals and defensives. In terms of opportunities at an asset class level, even though emerging markets is a riskier asset class, it is one of the few that is on sale. So that along with [INAUDIBLE] investments is our preference for next year.

- All right, Angelo, have to leave it there but appreciate your time. Angelo Kourkafas, Edward Jones investment strategist.