Welcome to our GWS quarterly summary and 2022 outlook. Each quarter, we review final market numbers and data to reflect on key events and share our insights with our clients and community. As always, we’re here to give you actionable advice so you can make informed decisions with your money.
If you’re a subscriber to the Weekly Market Insight webinars my colleague Chris Arends and I host every Wednesday at 3:30 p.m. CT, you know we like to stick to a few key themes to update each week. Let’s start by reviewing our 2021 themes and see where they landed — as well as where we see each heading in 2022.
Theme #1: Covid-19
2021 Recap: As predicted, Covid-19 hung around in the spring, wreaking havoc on the market. After that, the market largely ignored it — and I think I speak for everyone in saying that the pandemic is hopefully behind us. The virus remains with us, but as the susceptible population drops, the severity of the outbreaks declines. 2022 Predictions: This is likely Covid-19’s last year as a market-moving threat.
The omicron strain is less severe and more transmittable than alpha, and the susceptible population is declining. This virus is unlikely to continue as political movement, as it is perceived to cost the democrats in polls and recent elections.
Theme #2: Monetary Policy
2021 Recap: Early last year, we said central banks would be accommodative and might be the only game in town. Central banks certainly were accommodative, but you could make an argument that there are lots of ways of thinking and infrastructure available to build out that accommodative strategy. We had anticipated the Georgia runoff election would be another major player in the monetary policy game; however, without the full Build Back Better Bill passing, it didn’t have much of an impact. Monetary Policy
That leaves the question, do we think Congress will try to scale down the rest of the rest of the bill and get it passed? Absolutely — politicians love spending! But the focus of the bill will likely change, largely due to the burgeoning power of populism.
Speaking of populism, this “people over the elite” stance toward politics is quickly gaining ground. Just ask New Jersey’s longtime state Senate president, Democrat Steve Sweeney. Last year, he handily lost to a new candidate, Edward Durr, who spent just $153 on his campaign — but had an R at the end of his name in a very blue area of the country. I am sure this concerns democrats, as many are not seeking reelection.
As you can imagine, democrats are getting concerned about what this year’s election will look like. They’re thinking, “How can I prevent a red wave — or at least prevent it from taking me out?” That’s where the focus will be going into the new year.
We’re also predicting that central banks will be forced to tighten monetary policy to maintain credibility, as inflation remains elevated 6-8% (before moderating late Q4 ~4%). There are still three pending rate hikes closing 2022 at 0.75-1% of the Target Fed Fund Rate.
Theme #3: Domestic Economy
2021 Recap: Let’s talk domestic economy. We saw about 4.5% growth1 this year, which is somewhat to be expected considering the amount of money the Fed poured into economy. We also experienced significant inflation, which was not a surprise to us at GWS, but was a surprise the market. Many people believed inflation would be transitory. After all, the Fed did a lot of money printing in 2008, and inflation hasn’t been around for decades.
However, some of the forces that were at play then have weakened in present day, especially in the labor market. We’ll discuss this in further depth during a future Weekly Market Insights.
As for currency, the dollar strengthened, and the amount of money created by the Federal government caused an unprecedented demand for imports.
In 2022, wage growth continues to increase as a percentage of GDP. The labor force participation and technology improvements will likely dampen inflation in Q4.
The USD still remains the fastest turtle. Rate hikes maintain strength, but uncertainty around CB policy keep us neutral on USD. GDP will likely stick around 4 - 4.5% growth with corporate profits decreasing as a percentage of GDP.
With Congress struggling to push through large stimulus bills, the Federal Reserve beginning to taper, and us approaching two years since the last market pullback, we expect a correction in 2022. The question is when? We know they won’t ring a bell at the top. Be diligent and be ready!
Theme #4: International Economy
2021 Recap: Moving internationally, global GDP came in above 5%. China, Europe, and Japan continue to struggle economically due to demographic issues. 2022 Predictions: This year, we anticipate GDP to be about 4.25 - 4.75%, led by emerging markets (less China). The Chinese markets remain volatile, causing us to begin 2022 with an underweight as we continue to evaluate regulatory risk. Europe and Japan continue to struggle.
Theme #5: Stocks
2021 Recap: Last year, valuations were stretched, which led to more names in the index. The recession cleaned up balance sheets, Earnings Per Share (EPS) expanded, and technology continued to lead after the value rotation. Finance and banking rose out of the bottom. 2022 Predictions: We expect valuations to become more moderate as terminal values contract with rising interest rates and share of corporate profits decreases.
EPS growth likely will stay strong, with target EOY S&P 500 earnings at $222 (8% earnings growth). This places the fair value at 5,000 – 5,100. Sectors to watch include Financial Services, Real Estate, and Technology.
Theme #6: Fixed Income
2021 Recap: Municipal bonds tend to perform well if there’s a blue government, and this held true in 2021. Rates remained low, but inflation was higher than yields. We would argue we have a debt bubble ... but one that is not quite ready to pop. Fixed Income
It’s likely that interest rates will continue to rise, potentially putting the EOY 10-year Treasury Yield at 2.25 - 2.5%. Credit spreads will probably continue to widen modestly. Aggressive Investors will remain underweight to FI with the potential for FI and Equity to be correlated in pullbacks. Muni bonds look to be volatile and tied to tax policy, with a target duration of 0-3 years.
Clearly, there’s quite a bit of market activity to watch for in 2022. From Covid-19's lessening impact on the market, to tightened monetary policy and emerging markets leading international GDP growth, we’ll keep you updated as these and other themes emerge.
Regarding a correction, we continue to believe we have a debt bubble. The Barclays Agg was negative last year in nominal dollars. CPI was 7% on the last release, so they lost tremendous value. Bonds are likely to continue to struggle, they can act as a ballast but keep your duration short to remove the risk of rising rates. The Fed will likely step in if the market begins to unwind.
As always, the GWS Investment Committee is committed to the following investment management goals for our clients in 2022:
To pursue long-term returns that first and foremost strive to help clients work toward all goals in their financial plans.
To seek excess return above each portfolio’s benchmark over a three-year trailing time period and a full market cycle, in order to hopefully cover client fees and add surplus to their portfolios.
To implement investment strategies that align with each client’s personal volatility and benchmark sensitivity to help them remain confidently invested and long-term focused.
We’ll continue to provide updates on these and other market happenings, so be sure to subscribe to our YouTube channel so you never miss a Weekly Market Insight webinar (Wednesdays at 3:30 p.m. CT). We’ll see you there!
The opinions expressed are those of Aaron Tuttle and Gatewood Wealth Solutions as of the date stated on this material and are subject to change. There is no guarantee that any forecasts made will come to pass. This material is for general information only. This material does not constitute investment advice and is not intended to endorse any specific investment or security.
Please remember that all investments carry some level of risk, including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested directly. Returns represent past performance, are not a guarantee of future performance, and do not indicate any specific investment. Diversification and strategic asset allocation to not assure a profit or protect against loss.
When interest rates rise with fixed income securities and bonds, bond prices usually fall, because an investor may earn higher yield with another bond. Moreover, the longer the maturity of a bond, the greater the risk. When interest rates are at low levels, there is a risk that a significant rise in interest rates can occur in a short period of time and cause losses to the market value of any bonds that you own. The bond’s issuer is obligated to return the investor’s principal (original investment). As a result, high-yield bonds present greater credit risk than bonds of higher quality. Bond investors should carefully consider interest rate risk, credit risk, liquidity risk, securities lending risk, repurchase, and reverse repurchase transaction risk.
1 U.S. Bureau of Economic Analysis, December 2021
2 World Bank, Jan. 11, 2022