The year 2021 was another challenging year with the pandemic raging on beyond what most optimistically believed with vaccines coming on the scene. Can 2022 be the year most thought 2021 was supposed to be?

I can’t think of a more difficult time to predict what’s ahead with so many influences clashing together like those of a sumo wrestling match. As Yogi Berra is credited with saying, “It’s tough to make predictions, especially about the future.”

The stock market had another fantastic year, by most measures. However, it was a bifurcated market that saw many names with large declines under the surface of the headline indices. Many of those made sense as money flowed from names that thrived during a more lockdown-oriented economy to one of reopening. International stocks, while positive, underperformed the S&P 500 by the largest margin in two decades. The overall bond market ended slightly negative for the first time since 2013 as inflation concerns started to move interest rates off the near-zero bound.

Inflation arose as the biggest concern of 2021. It’s now listed ahead of the coronavirus in many surveys. Much of the argument centered around whether it is transitory from a restarting economy or if it could remain more persistent. One thing I feel certain of for 2022 is it will remain a hot topic, especially into the mid-term elections. Even if demand softens, omicron, wage demands, and poor energy policy could keep inflation elevated for longer than we hope and imagine.

It’s been over 40 years since inflation has been a real threat. Most working adults have no memory of how much it can hurt and how to best deal with it. That includes a Federal Reserve and government that haven’t had to consider the consequences of their financial actions. They are now likely boxed into the tightest rock and a hard place since the 1970s.

It appears they are going to be forced to make the tough decision that is likely to either kill the market or increase inflation. I’m not sure they can avoid one or the other. Another way to say this is will they try to save the rich or the poor? If they do little to attack inflation, the stock market, along with inflation, could continue to run unabated. If inflation continues to run rampant, they are going to cause massive fear and anger as households without much, or any investments, get priced out of, well, everything. That includes Millennials who have multitudes higher debt from their education, housing that is multitudes more expensive, and rent prices that have moved relentlessly higher.

It won’t take too much longer before inflation leads to elevated political anger and unrest. The measures to potentially help ease inflation are likely to be bad for the stock market. So, the most important thing to watch, in my view, is to see if the Federal Reserve and government can thread the needle of inflation that is best for both the market and for inflation. It’s not a job I’d want, and I don’t see how they can help one without the expense of the other.

On the economic front I believe we should see another positive year. As omicron recedes into the spring, hopefully characterized by being less lethal, I believe we’ll continue to see pent-up demand for services move higher. I know I’ll be taking my first vacation in over two years, and I suspect many will be doing the same. This could exacerbate the inflation issue and end up continuing the baffling correlation of the economy and the markets.

Just when people may believe the economy is moving forward from the pandemic in a more sustainable and substantial way, the market could see a larger correction than we’ve seen since the market bottomed in at the height of the early 2020 lockdowns.

Returns for the past decade have been outstanding, and valuations by most measures are rich. Inflationary times tend to lead to a recession. This is why I think the most likely outcome is that 2022 will be characterized by a tale of two stories between the economy and the stock market. We may see a booming first half of the year economically that increases inflation to the point where the Fed has to get aggressive in removing the supports the stock market has grown so accustomed to.

How exactly that plays out for your investments is incredibly hard to calculate. There are many paths this could take, so take my forecast with a large grain of salt. One should probably shy from market predictions, but I will offer one anyway. I believe we will continue to see a strong stock market anticipating what I believe will be a robust start of the year. I’ve been saying we could get a massive euphoric ending to this bull market for a few years. While early last year certainly qualifies, my suspicion is we’ve yet to see the full extent of this play out in the major indices.

The proliferation and momentum of index investing could end up with a GameStop type ending to the major indices. COVID has certainly led to a rollup of power to fewer names, and market indexes are built to capture that momentum. There are still trillions of dollars on the sidelines that have no real alternative for their investment dollars to earn a return on. Market and economic momentum could cause a panic buying of sorts. This would likely lead to more inflation and a need to stifle it, and just as fast as the market rises in this scenario, it could fall from the actions to stop the inflation.