Markets face a myriad of hurdles as we approach 2022; supply chain constraints, high inflation prints, political landscape changes, 2022 Mid-term elections, and a tight labor market to name a few.
The FOMC concluded its last meeting of 2021 on December 15th and their position was predictable. They signaled an accelerated taper of asset purchasing into Q1 and supported 3 rate hikes throughout 2022, all on the tail of a 6.8% inflation print. The need for tighter monetary policy becomes pellucid when American’s feel the inflation tax at places like the grocery store and the gas pump. Growth stocks pulling back for the last 6 to 8 weeks can be considered a leading indicator as the FED should follow what the market is dictating. Leading growth stocks have seen their multiples contract since late October, some as much as 30-40% off of their all-time highs. Raising rates will slow the flow of credit and make high growth stocks less attractive, all with the intention of curbing the perverse effects of inflation.
The labor market is experiencing many shifts as the latest data shows there are 11 Million job openings across the country. Unemployment posted at 4.2%, meaning there is about 1.3 open jobs for each person looking for work. This can be seen as a positive for 2022 because as more people get back to work and fill these open jobs, we can see more strength and stability return to the economy. One of the largest issues, however, is the pandemic has effected the rate at which Boomers are retiring. Many of the open jobs can be attributed to an older generation leaving the workforce permanently and not younger people being unwilling to work due to poorly aimed government incentives. (Please ignore the loaded rhetoric of “lazy millennials” in that article.)
We see a stronger economy into Q3/Q4 of 2022 and through 2023 if inflation can be tamed and if a legitimate step forward in controlling supply chain issues comes to fruition. Earnings for corporations continue to embark on all-time high quests, Q3 2021 printed a $2.5Trn for corporate profits.
Sectors to benefit from tighter monetary policy include consumers and financials; big banks could see a boost from increasing their lending next to engaging in speculating. We see big tech and fundamentally sound growth stocks possibly stomaching some weakness but fully returning in mid to late 2022. Advancements in technology, in areas such as automation and robotics to improve operations and streamline businesses, are key deflationary pressures. Over the last several decades, the leaps and bounds in technological advancements have contributed to chaining inflation near 2% even while following the Great Financial Crisis when the fed doubled its balanced sheet through aggressive quantitative easing.
We’re looking for strong balance sheets going into the next 18 months and watching the digitalization movement materialize further. Semiconductors will be at the forefront because they also play a key role in more electric vehicles reaching the market which has been on investors minds as of late. We are allocating less than 15% of capital to high yield assets to gain portfolio income and look to remain agile.
Nier Capital Group 