The current status of our world during the ongoing global pandemic and with impacts on supply chains makes for an interesting time as an investor. New investors are trading in a climate that is unique, but even those with more experience are in uncharted waters. “What’s going to happen in the next few years?” is a question I hear often, and in lieu of turning to a crystal ball, I turn to historical trends.

Many people will be familiar with markets that have a ‘melt down’, in which prices plunge. However, sometimes markets ‘melt up’, as prices get pushed north by a wave of buying pressure. There are several reasons why we could see a melt up in equity prices over the next few months.

Impact of inflation

Inflationary pressures are building and no longer appear as transitory as central bankers have been claiming. Shares typically do well during inflationary times, with technology and consumer goods being top choices for stability. It’s expected that these will begin to ease toward the second half of 2022.

US spending programme

The US government is embarking on a multi-trillion dollar spending programme. Much of those funds will be going into infrastructure such as roads and bridges. This will create new jobs and in turn lead to increased consumer spending. The US economy is very heavily driven by consumption, so we expect this government spending ultimately will stimulate the economy and in turn lead to corporate earnings. Higher corporate earnings should lead to higher share prices.

Interest rates vs inflation

Although interest rates are rising, they are not going up as fast as inflation. For example, in New Zealand, the official cash rate was lifted from 0.25% to 0.5% a few months ago, which has helped bump up bank deposit rates from under 1% to under 2%. However, inflation is running at an annualised rate of 4.9%, meaning people’s savings are losing their value. This is encouraging people to take money out of the banks and invest in the share market, where there is at least the hope of generating a better return from dividends and capital gains.

Reopening and recovery

Many economies see a rebound in activity each time lockdowns ease and borders open. Once people emerge from lockdown, they tend to catch up on ‘pent up’ purchases and activities that they could not indulge in while limited to their homes. This can range from services such as massages and haircuts, to going out to bars and restaurants, to upgrading their cars. Since overseas travel is still restricted, people are tending to spend more on their homes and gardens. Altogether, the unleashing of pent-up demand stimulates demand which in turn boosts corporate profits.

Record high share prices

Some high-profile companies like Tesla are hitting record highs – Tesla is now a trillion dollar company despite being only marginally profitable – and investors often chase the prices of such companies with great enthusiasm.

Surprises in 2022

“With the S&P 500 continuing its trudge to new highs almost every day, it is clear markets are pricing in a lot of upside surprises for 2022,” says Nicholas Colas, co-founder of US-based DataTrek Research.

“Whether you are bullish or bearish on US large caps at present, there is no doubting what markets are saying as they hit new high after new high: 2022 will be another year of positive surprises”, Colas adds.

So, despite all these positive influences, investors need to be aware that the faster a market goes up, the more suddenly it can come down. Enjoy the melt up if it occurs but be prepared to get out quickly if things start going south and make sure the bulk of your portfolio is invested in relatively large, secure businesses as these will be less volatile when the market inevitably corrects.