Passive investors face tougher sledding as new year begins – Morgan Stanley

The US stock market has rewarded passive investors handsomely in recent years, but that could soon change. Lisa Shalett, Chief Investment Officer, Wealth Management at Morgan Stanley, explains why passive investors may have a tougher time in 2022.

More challenging investing landscape in 2022

“Better-than-expected economic growth and persistent inflation will likely cause the Federal Reserve to raise the fed funds rate, which could unmoor real rates from historic negative lows and prompt market volatility.”

“Overwhelming liquidity in the markets and year-end technical positioning are factors expected to fade this year. In addition, higher costs for labor, energy and logistics will likely continue to weigh on corporate profits.”

“While many believe that Congress will pass a version of these education, healthcare and climate initiatives ahead of the 2022 midterm elections, timing matters. Ambiguity around stimulus extensions could fuel concerns about a ‘fiscal cliff’ just as the Fed is poised to make its first interest-rate hike at mid-year. That could compound the effects on consumers of tightening financial conditions.” 

“The Treasury market could see outflows against a backdrop of persistent inflation and lessening liquidity.”

“The S&P 500 has come to be dominated by a handful of mega-cap technology stocks. With federal regulators and global tax policymakers taking a hard look at these companies, new oversight could have ripple effects on markets.”