As snow begins to blanket northern parts of our nation and holiday lights twinkle on city streets, Wall Street firms begin rolling out their forecasts, projections and economic outlooks for the next year.

As the nation continues to grapple with political polarization in the wake of the 2020 presidential election, the uncertainty of a new COVID variant, Omicron, and unsettling high levels of consumer inflation, what could lie ahead?

Let’s take a look at a few key themes and forecasts for 2022.

Inflation to Sizzle Next Year

All year long, inflation has been climbing higher. You’ve noticed it at the gas station, the grocery store, at the car dealer and even for everyday goods you buy for your home. You aren’t imagining it. In November, the consumer price index (CPI) surged an alarming 6.8%, recording the biggest jump in 39 years. Don’t expect that to change anytime soon.

In 2022, expect inflation to remain high, says Wells Fargo in its 2022 Annual Outlook. The U.S. is expected to beat all the advanced and developing nations with the highest CPI rate in 2022 with a robust 5.3% inflation rate.

Federal Reserve Interest Rate Hikes Are Coming

After holding interest rates at the 0-0.25% level in an effort to stimulate the economy after the COVID crisis, the Federal Reserve is expected to begin raising interest rates in 2022.

The U.S. Fed has a unique “dual mandate” which are to 1) promote maximum employment and 2) to maintain inflation at the 2% rate over the long run.

Well, inflation is running hog-wild right now and the Fed hasn’t even stepped in to attempt to lasso surging prices in the least.

How is the job front? In November, the U.S. unemployment rate fell to 4.2%, leaving 6.9 million Americans unemployed. These numbers are vastly improved from the depths of the February-April 2020 recession, yet they remain higher than pre-COVID levels at 3.5% and 5.7 million unemployed people in February, 2020.

Inflation will force the Fed into action in 2022. The rising level of consumer prices on everything from lumber for home improvement projects to the price of a new sweater will leave the Fed no choice but to begin raising interest rates next year.

Wells Fargo says the central bank forecasts that the Fed will hike interest rates twice in 2022 by a modest 50 basis points in total. That would still leave the fed funds rate at a historically low level of .50%-.75%.

GDP Growth around the Globe

In 2022, most advanced economies like the U.S., Japan, the Eurozone and the Scandinavian countries will record gross domestic product (GDP) growth in the 3.1 to 4.4% region. Wells Fargo predicts the U.S. will lead the advanced economies with the fastest pace of growth at 4.4% next year. In the developing countries, India is projected to lead with a sizzling 9.2% GDP growth rate in 2022. China is expected to come in at a 5.5% growth rate.

What You Can Do Now

Inflation is running at its highest level in decades, the Fed is poised to hike interest rates and the stock market remains frothy and overvalued.

As you review your financial picture at year-end, consider your portfolio allocations. Are you rebalancing every quarter or at least once a year?

Your current equity allocations are likely stretched and off target leaving you vulnerable to greater market risk, downside action and volatility than you even realize. It’s time to rebalance your portfolio and consider increasing your allocation to tangible assets like physical gold and silver.

Use history as a guide and an example. During the 2008 bear market, the S&P 500 fell 48% in six months. That means if you have $100,000 in stock investments, that value plunged to $52,000. What happened to gold during that time? After the 2008 global financial crisis, gold climbed from $700 to $1,900 an ounce, more than doubling its worth.

Gold acts as an insurance policy, a hedge against equity market declines and a vehicle to protect and grow wealth. As an investor, when you own physical gold, you are building a better diversified portfolio, especially during times of uncertainty that is the world we live in today.

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If two separate investments deliver the exact same return over the same period which is better? The concept of risk-adjusted returns helps answer this question.

An investment’s risk-adjusted return reflects the amount of risk an asset presents to deliver a particular return, or possible return. In other words, the risk-adjusted return reflects not only the assets earning power but also the potential for loss.

Here is another way to think about risk-adjusted returns. Consider two hiking trails that both lead to the same destination. One trail is treacherous. It has steep cliffs, jagged rocks, and rushing water. The other trail is flat, and straight. The second path, which presents less risk, is the one with the higher risk-adjusted return because the traveler incurs less risk in their journey to the destination. The first path has a lower risk-adjusted return because the traveler faces more threats on their way to the destination. They may get there but doing so might mean spraining an ankle or breaking a bone.

This measurement is helpful in comparing two investments that may seem identical when examined based only on their historical return.

There are several ways to measure risk adjusted returns. One popular method is to use the Sharpe Ratio which takes the return of the investment less the risk-free rate and divides it by the investment’s standard deviation. The standard deviation could be thought of as more rocks and cliffs on the trail. Typically, a higher Sharpe ratio represents a better investment choice.

The Sharpe ratio illustrates why an investment that delivers 14% in returns might be less desirable than an investment that only delivers a return of 11%. Why? Because the investment that returns 14% can only do so by exposing the investor to greater risk than the risk associated with the investment offering an 11% return.

This concept illustrates how investors can reduce the overall risk profile of their portfolio by including assets with higher risk-adjusted returns. For example, one study showed that allocating 5% to gold can improve the risk-adjusted return in a portfolio consisting of 60% stocks, and 40% bonds.

Now is a good time for investors to revisit the risk-adjusted returns of their portfolio because volatility in the stock market is climbing. Moreover, the median P/E ratio of the S&P 500 over a period of about 150 years is 14.9 and the current P/E ratio is 28.6. This significantly higher figure suggests that investors today have considerably higher expectations for future stock market performance.

Investors can counterbalance this elevated risk by allocating a portion of their portfolio to gold. The reason for this strategy goes beyond today’s heightened P/E ratio. Gold will likely also serve as a volatility stabilizer as the world continues to struggle with a fractured international response to a changing COVID pandemic. Additionally, the Federal Reserve’s recent plans to step back from quantitative easing may also spark a flight from stocks into relatively safer investments.

Risk-adjusted returns reminds us that not all profits are the same even if the percentages are identical. The path journeyed to reach those returns often determines the traveler’s fate.

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