Q1 2022

Investment Outlook

Explore Our investment Outlook


January 2022

Navigating Obstacles on the Road to Recovery

By Victor Zhang

Global Economy Isn’t Yet Firing on All Cylinders

Pre-pandemic, the world economy ran like a finely calibrated machine. People readily crossed borders for business or leisure. Dependable and globally connected supply chains efficiently delivered parts and finished goods just in time to avoid excess inventory.

COVID-19 turned out to be the monkey wrench that caused critical components of this economic engine to fail.

Despite ongoing uncertainty, economic recovery is well underway as the pandemic’s second year winds down. Mobility is picking up, businesses are strengthening their distribution networks, and many of us have adopted new personal and work practices. This progress aligns with estimates that the global economy is on track to grow a robust 5.9% in 2021 before moderating in the new year.1

This issue of our Investment Outlook highlights opportunities we’re finding in this environment and some of the risks dampening our 2022 viewpoint. 

Fiscal and Monetary Stimulus, Supply Bottlenecks, Rising Energy Prices and Wage Growth Push Inflation Higher

We began 2021 concerned the initial U.S. Consumer Price Index (CPI) reading of 1.4% didn’t accurately reflect the upward pressure on prices.

Despite the prevailing view that the rise would be temporary, our concerns came to fruition as inflation climbed steadily throughout the year. The 6.2% CPI reading in October was the highest since 1990.

Our Global Fixed Income team expects inflation to recede and settle under 3%, well above the sub-2% levels we’ve grown accustomed to in recent years.

Rising costs are weighing heavily on the minds of corporate executives. The number of S&P 500® companies mentioning inflation during the most recent earnings calls hit a 10-year high, according to FactSet.2

Expect Central Banks to Be More Active

In November, the U.S. Federal Reserve (Fed) began winding down its asset purchase program by $15 billion per month. If it continues tapering at this rate, the central bank could eliminate asset purchases by mid-2022, with the potential for rate hikes in the second half of the year or earlier.

Even before the Fed announced its tapering plans, we’d seen the yield on the 10-year Treasury note climb. We expect it to stabilize between 1.75% and 2%. This higher yield increases borrowing costs throughout the economy and tends to reduce the relative attractiveness of stocks compared to bonds.

Meanwhile, the European Central Bank (ECB) remains committed to holding interest rates at 0% and won’t hike rates until inflation stabilizes at 2%. Many emerging markets (EM) central banks, however, have started raising interest rates to control inflation to help prevent currency devaluations.

Companies Are Overcoming Higher Costs–So Far

Higher wages and the tight labor supply are pressuring companies across a broad swath of the market. For example, health care providers are telling our investment teams that staffing for hospitals and other facilities is so tight they’re paying temporary nurses up to five times more than their permanent nursing staffs.

Elsewhere, transportation costs are rising as trucking companies struggle to find drivers. And anyone who has been shopping or dined out recently won’t be surprised to learn that even with a $15 minimum wage in some locations, retail employers are having trouble recruiting workers at twice that pay.

So far, companies have been able to raise prices to cover their higher costs. During the third quarter, two-thirds of the largest U.S. companies delivered higher profit margins than they did before the pandemic.3 Earnings growth also was strong in Europe and Japan.

We think forecasts that margins will shrink during the next two quarters are too pessimistic. In our view, businesses willing to test the limits on how much they can raise prices before losing customers could maintain healthy profit margins.

Selectivity Will Be Paramount

After a remarkable year of recovery, we believe the global economy and markets are poised to return to more normal patterns in 2022. We also expect occasional volatility given the macroeconomic environment and continuing impacts of COVID. The market’s reaction to news of the omicron variant on November 26 is a good case in point.

We believe active security selection will make a difference under these conditions. For example, rising inflation highlights the importance of identifying companies with strong competitive positions and enough pricing power to pass along higher costs to their customers.

Also, given the higher yield on the 10-year Treasury, companies that generate significant current cash flows may hold up better than businesses whose cash flows are forecast far into the future.

In bond portfolios, we prefer short-duration corporate bonds that offer higher yields than government securities. And, for some investors, short-duration inflation-protected securities may provide a dual advantage of helping to reduce inflation and interest rate risk.

Thank you for entrusting us with your capital.


1“World Economic Outlook,” International Monetary Fund, October 2021.

2John Butters, “Highest Number of S&P 500 Companies Citing ‘Inflation’ on Q3 Earnings Calls in Over 10 Years,” FactSet, November 12, 2021.

3Kristin Broughton, Theo Francis, “What Does Inflation Mean for American Businesses? For Some, Bigger Profits,” Wall Street Journal, November 14, 2021.



Key Takeaways

We expect 2022 to bring a slower pace of economic and profit growth due to COVID uncertainty, supply chain disruptions, labor shortages and inflation.


It’s still all about the pandemic. At the risk of sounding like a broken record, we expect markets to rise and fall along with shifting expectations for the pandemic to end.

 

Inflation hasn’t dampened profits—yet. So far, companies have been able to pass along higher costs to customers, and many have reported higher profit margins than they did before the pandemic.

 

Quality on the cheap. Following an extended period of risk-taking supported by easy monetary policy and generous fiscal spending, we believe investors will place a higher premium on high-quality companies and low volatility. 

 

Emerging markets have room to grow. Thanks to improving vaccine procurement and distribution, we believe the EM recovery will continue to strengthen as restrictions ease and mobility increases. 

 

We have a positive outlook for U.S. credit. We continue to find opportunities among investment-grade and high-yield corporate bonds, especially in the banking and finance sectors.


Q1 2022 Investment Outlook Resources

References to specific securities are for illustrative purposes only, and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.

International investing involves special risk considerations, including economic and political conditions, inflation rates and currency fluctuations.

Alternative mutual funds that hold a variety of non-traditional investments also often employ more complex trading strategies than traditional mutual funds. Each of these different alternative asset classes and investment strategies have unique risks making them more suitable for investors with an above average tolerance for risk.

Diversification does not assure a profit nor does it protect against loss of principal.

Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.

Mutual fund investing involves market risk. Investment return and fund share value will fluctuate. It is possible to lose money by investing in mutual funds.

The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.

No offer of any security is made hereby. This material is provided for informational purposes only and does not constitute a recommendation of any investment strategy or product described herein. This material is directed to professional/institutional clients only and should not be relied upon by retail investors or the public. The content of this document has not been reviewed by any regulatory authority.

American Century Investments is not responsible for and does not endorse any comments, content, advertising, products, advice, opinions, recommendations or other materials on or available directly or via hyperlinks to third party applications or websites. Logos or icons used are registered trademarks of their respective owners.