2022 Outlook: The Year of Fat Tails (December 16, 2021)

by Mark Keller, CFA, Bill O’Grady, and Patrick Fearon-Hernandez, CFA | PDF


  • We don’t expect a recession in 2022. Real GDP growth will range between 3.0% to 3.5%. Inflation remains elevated, though price pressures will likely subside in H2 2022. We expect the core PCE deflator, the Federal Reserve’s preferred measure of inflation, to decline into a range between 3.5% to 3.0%. Overall CPI will decline into a range of 4.0% to 3.5%. So, inflation will remain elevated but should ease. Labor markets should slowly normalize, with unemployment reaching 4.0% by year’s end.
  • The 10-year T-note will end the year with a yield of 1.85%, with an intra-year peak of 2.20%. Our base case is that the Federal Reserve will end its balance sheet expansion by mid-2022, but the first rate hike is more likely to come in Q1 2023.
  • The S&P 500 will reach 5000 in 2022, approximately 6.0% higher than the expected 4700 at year-end 2021. Given liquidity conditions, we would carry an upside bias to this forecast. On the negative side, inflation is elevated, multiples are stretched, and bottlenecks and rising labor costs could eventually hurt margins. On the positive side, liquidity is ample, especially in the top 10% of households, and will tend to support equities. We favor value over growth and small caps over large caps. We remain favorable to foreign stocks.
  • We still view the dollar as overvalued, but some sort of exogenous catalyst will likely be necessary to change the current bullish sentiment.
  • We are bullish commodities and believe we are in the early stages of a broader bull market. Gold is undervalued on a long-term basis but is facing competition from bitcoin.

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