This article was originally published on ETFTrends.com.
Investment management firm ProShares recently discussed its views on inflation and interest rates, optimistic outlook for stocks, why bonds will be challenged, good thematic opportunities, and investing in digital assets in 2022 on a webcast hosted by Tom Lydon, CEO of ETF Trends.
Troy Goldstein, executive director and head of national accounts at ProShares, opens by discussing the challenges of 2021 as the economy began recovering but faced significant issues with supply chains and market volatility. Speaking to that volatility that markets are continuing to experience, Simeon Hyman, CFA, global investment strategist, and head of investment strategy at ProShares, discussed the outlook for 2022 with a hawkish Fed.
“What will Fed tightening mean? For bonds, give you a hint, not good,” explains Hyman. “What does it mean for stocks? A bit more mixed, again consistent with what advisors are saying, that there may be a little bit more optimism around stocks.”
Most advisors are concerned about the role of bonds and their performance potential for income in the current market environments, but Hyman is quick to point out that one of the key roles that bonds play in a portfolio is that of diversification.
Fed tightening is important because the bond-buying stimulus that was suppressing long-term will not be in play any longer, and this means that the long end of the yield curve could continue to rise. Hyman believes that elements of inflation are transitory, such as the pressures from supply shortages driven by supply chain issues. Supply chains in the second half of 2021 began to recover and catch up somewhat with demand, a trend that he sees as continuing.
As the supply chain inflationary pressures ease, Hyman sees it as helping to bring down some inflation, though it will still be too high for bonds to perform well, and he predicts that stocks could stand a better chance. He cautions against going after the most value stocks, though.
“Even the cheapest stocks have tremendous duration exposure, and the only antidote for that is growth-of-earnings and dividends, and that’s really what this will come down to in finding the right strategies in the equity market and the reason why stocks are in a better place than bonds going into 2022,” Hyman says.
Kieran Kirwan, director of investment strategy at ProShares, then discusses the impact of rising rates on stocks. Kirwan explains that rising rates are not always a headwind for stocks and that looking back historically, there are several points at which stock performance continued in rising rate environments.