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.

“Stocks can, and have done, just fine in the past in periods of rising rates,” Kirwan says. ProShares went through and analyzed different sector correlations to the 10-Year Treasury Yield and created the Nasdaq U.S. Large Cap Equities for Rising Rates Index based on its findings. When the 10-Year Treasury was at its lowest in 2020, this index was producing nearly double the returns of the S&P 500.

ProShares believes that investors looking for income should consider dividend growth strategies with the dividend aristocrats, the 65 companies within the S&P 500 that have exhibited dividend growth over the past 25 consecutive years, as well as mid-cap and technology aristocrats. An example of one such opportunity is with Microsoft, which is the largest dividend payer globally and grew its dividends 10% the last time it raised them, Kirwan explains.

Pivoting to discuss thematics, Dr. Scott Helfstein, executive director of thematic investing at ProShares, says that 2021 was a difficult year for thematics, with water themes being the only group to beat out the S&P 500’s performance. There is a growing gulf between the fundamentals of companies and the fundamentals in markets, with most companies in thematics performing strongly in 2021. Thematic areas that ProShares is watching include renewable energies, smart factory automation, genomics and biotech, and e-commerce.

Speaking last on digital assets, Daniel Bush, CFA, CFP, and investment strategist at ProShares, describes the potential use of a small allocation into bitcoin as a potential portfolio diversifier.

“A small allocation could go a long way; it does have fairly significant risk profile to something like fixed income, so it’s going to be a lot more volatile but something that you could add potentially just 4% or 5% and drastically change the overall risk and reward profile for a diversified portfolio,” Bush says.

For more news, information, and strategy, visit the Crypto Channel.

Financial advisors who are interested in learning more about the ProShares’ 2022 Outlook can watch the webcast here on demand.