Investment Outlook, January 2022
January 8, 2022
Economic expectations at the beginning of 2021 were sky high. We were on the verge of a vaccine roll out, and we could imagine a return to pre-pandemic lifestyles. Americans were eager to get out and spend the abundance of extra cash in their pockets. Maybe deep down we knew it was never going to be that easy- but those elevated base expectations for a smooth recovery may have been a contributing factor to the sharp decline in public and consumer confidence that has unfolded into the start of 2022.
At the beginning of this year, COVID-19 is still at the center of economic unease. The new Omicron variant is spreading quickly in the U.S. with case levels well above last winter’s highs. Outbreaks among already understaffed NYC restaurants are forcing some owners to temporarily close-up shop. Flights are getting cancelled across the country as pilots and crew members test positive, and businesses across all industries are rapidly re-thinking return to work plans.
Despite the relative gloom and fatigue, thanks to vaccines and treatments, hospitalizations and deaths are still well below last year’s winter and summer peaks, and the number of travelers passing through TSA daily over the past three weeks is still up nearly 100% compared to last year. As new variants are found to cause milder disease, it seems that COVID is likely to turn endemic in 2022– much like the flu- and in that light, we will be re-imagining the ongoing reality for our economy and our lives.
Through several waves of the pandemic this year, U.S. GDP growth will likely come in above 4% for 2021; the fastest we’ve experienced in 20 years and almost double the 2.2% achieved pre-pandemic in 2019. While consumer demand should remain strong in 2022, there are a number of ongoing economic stresses. Federal Reserve chairman Powell most recently reminded us that “Supply and demand imbalances related to the pandemic and the reopening of the economy have continued to contribute to elevated levels of inflation.” Inflation levels are a reflection, however, not a cause, of the headwinds we face in 2022. Supply chain logistics are still slowing U.S deliveries. Manufacturers can’t produce against record order backlogs and our labor supply is constrained both by household pandemic struggles as well as by the emotional fallout of the past two years. Prime age (25-54) labor participation is well below pre-pandemic levels, stagnating since the summer of 2020. With 11 million job openings most recently reported in the U.S., wages are being pushed up as everyone is struggling to understand the labor participation disconnect. While we expect that Omicron will continue to constrain economic activity at the start of this year, we also expect these various economic pressures may ease as the year unfolds and we find a balance between safety and normalcy. If so, global GDP growth for 2022 could still come in near 4% – well above the 30-year average of 2.8% and setting the stage for another good year for the markets.
Driven by the conflict between reported economic strength and pandemic induced stresses, the markets saw narrowing leadership this past year. The largest 10 stocks in the S&P 500 accounted for a significant percentage of the market’s over-all return, with most stocks achieving positive, but less spectacular returns for the year. This trend often precedes a period of rotating leadership in the market, with highly appreciated positions correcting back to the average. As we look to 2022, we still expect a positive year in the equity markets, but the path may be more muted and volatile than we saw this past year. We’ve added exposure to strong long-term prospects that tended to be unloved this past year, and we have reduced exposure to some of our highly appreciated investments, positioning portfolios to benefit over the long-term from the economic effects of life in a post-pandemic world.
We are energized by the start of 2022, and we share with you the optimism and potential a new year represents.