GGS Investment Outlook 2022

January 14, 2022

The global economy has bounced back from the pandemic faster and more robust than almost anyone expected, thanks in large part to tremendous fiscal and monetary stimulus from governments around the world. This year will test how economies can endure that assistance being dialed down or removed altogether, though plans vary dramatically for different countries around the world. As we look into 2022, these are a few key topics and events that are top of mind:

Inflation continues to be a major focus in financial markets, as it was in May 2021 when we wrote a dedicated piece on the topic. The main ideas from that post are still true today:

  • Investors are currently expecting higher near-term and long-term inflation levels than anything we have experienced in many years.1,2 This is already priced into financial assets. What matters for asset prices going forward is how inflation rates evolve versus these current expectations.
  • There are logical arguments as to why future inflation could be higher or lower than current expectations. At GGS, our research focus is on finding high quality, undervalued companies and building clients a properly diversified portfolio. We do not focus our research on whether future market inflation (and by extension, interest rate) expectations are too high or too low, and thus we are not placing a significant bet one way or the other in client portfolios.
  • Key questions with regard to inflation in 2022:
    • How quickly do global supply chain issues improve? Supply chain issues were improving into December before the recent omicron spike. The market expects that most major supply chain issues will improve dramatically once the current wave subsides, though order backlogs and continuing COVID-related issues, such as China locking down major port cities at the first sign of cases, will continue to keep this an issue throughout 2022.3
    • Will labor shortages continue to lead to broad wage increases? The US unemployment rate is now sub-4.0%,4 the number of US job openings continues to exceed the number of unemployed workers, and employees are quitting at the fastest rate on record.A number of companies have recently announced large-scale wage increases, including Starbucks,Amazon,7 JPMorgan,8 and the US Army.This trend is expected to continue in 2022 and may negatively affect corporate margins.

Monetary Policy will also be closely watched by investors in 2022. Due to the rise in inflation, a major shift is now occurring in Central Banks around the globe from prioritizing growth and employment to combatting higher prices.

  • On January 11, Fed Chair Powell spoke before Congress and emphasized the importance of combatting inflation.
    • While he continues to believe that the inflation scenario will improve as supply chain issues ease, he does expect to take action soon on interest rates and the Fed’s balance sheet.
    • Current market expectations regarding the Fed:
      • Three or four interest rate hikes in 2022, with the first occurring as soon as March 10
      • The end of the Fed’s bond-buying program (Quantitative Easing) in March
      • Beginning the process of shrinking the Fed’s balance sheet sometime in late-2022 11
  • The European Central Bank is also starting to lower its monetary accommodation and President Lagarde said on January 11 that their “commitment to price stability is unwavering, which is critical for the firm anchoring of inflation expectations and for confidence in the currency.” 12

Fiscal Policy will be an area of global divergence, with the US government expected to pull back spending significantly but other major countries continuing their major COVID-related programs.

  • The projected US Federal budget deficit is expected to decline to 4.7% of GDP in 2022 vs. 12.4% in 2021.13
  • President Biden has been pushing his Build Back Better spending bill worth $1.75 Trillion over a decade, though has had difficulty winning over all members of his own party.14
    • According to Moody’s Analytics, US GDP growth for 2022 is currently estimated at 4%, though this could fall closer to 3% if Build Back Better is not passed.15
  • Elsewhere around the world, the “fiscal cliff” will not be nearly as severe in 2022:
    • The rules that govern the amount of debt and deficits for Eurozone countries have been suspended through 2022, with many countries continuing with 2021 stimulus plans. The exception is the UK, which actually raised taxes in 2021 to help avoid adding to the deficit to fund increased spending on healthcare and public services.15
    • The Japanese government released a new spending plan in November worth upwards of 10% of GDP.16
    • While lower than prior years, the Chinese government has still projected 2022 growth to be above 5.0%.17 More stimulus packages are expected to help achieve that goal, especially in light of ongoing property-sector debt issues.18

Global Politics are not expected to be a major market force in 2022, but many issues bear watching such as:

  • Russia’s overt aggression against Ukraine. If the US imposes sanctions on Russia this could impact oil prices, in particular. Oil traders will also be watching renewed Iranian nuclear negotiations.
  • New developments in the US/China trade war. A reduction in tariffs is seen as unlikely in an election year, but it would help ease supply chain and inflation concerns.
  • US midterm elections, where Republicans are currently expected to win back the House of Representatives.19

Final Thoughts

Remember that there are always multiple global issues to worry about and by investing in the market you are being paid to assume those risks. GGS takes known risks into account when evaluating investments and designing client portfolios. We do our best to guard against unknown risks via scenario analysis testing, strict limits on client betas, and avoiding portfolio concentrations in any given geography, industry, or individual security. We continue to recommend clients avoid trying to time the market and stay fully invested to their target risk level in good times and in bad. We pledge to work diligently to invest your money in the best risk/reward opportunities that our research uncovers, and we appreciate you entrusting us with your assets.

Sources

1 https://fred.stlouisfed.org/series/T10YIE

2 https://www.newyorkfed.org/microeconomics/sce#/

https://abcnews.go.com/Sports/wireStory/china-locks-city-raising-affected-20-million-82192917

https://www.bls.gov/news.release/pdf/empsit.pdf

https://www.washingtonpost.com/business/2022/01/04/job-quits-november-2021/

https://www.businessinsider.com/starbucks-is-hiking-us-wages-amid-labor-shortage-2021-10

7 https://www.thestreet.com/markets/amazon-hiring-150000-seasonal-workers-amid-record-us-job-shortage

8 https://www.cnbc.com/2022/01/14/jpm-earnings-4q-2021.html

9 https://www.cnn.com/2022/01/13/politics/us-army-50-thousand-dollars-recruitment-bonus/index.html

10 https://www.cmegroup.com/trading/interest-rates/countdown-to-fomc.html

11 https://www.cnbc.com/2022/01/05/fed-minutes-december-2021.html

12 https://www.ecb.europa.eu/press/key/date/2022/html/ecb.sp220111~1778c4939d.en.html

13 JPMorgan Guide to the Markets 12/31/21, slide 22

14 https://www.politico.com/news/2022/01/12/inflation-biden-economy-agenda-526980

15 https://www.bloomberg.com/news/articles/2022-01-13/where-budget-cuts-to-government-aid-threaten-world-economic-growth-in-2022

16 https://www.nytimes.com/2021/11/19/world/asia/japan-stimulus.html

17 https://asia.nikkei.com/Economy/China-considering-lowering-2022-growth-target-to-5.5-6

18 https://doubleline.com/wp-content/uploads/Campbell-on-Beijing-Stimulus_December-2021.pdf

19 https://fivethirtyeight.com/features/some-early-clues-about-how-the-midterms-will-go/

Galvin, Gaustad & Stein (“GG&S”) is an SEC registered investment adviser located in Scottsdale, Arizona. GG&S and its representatives are in compliance with the current registration and notice filing requirements imposed upon SEC registered investment advisers by those states in which GG&S maintains clients. GG&S may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. GG&S’s web site is limited to the dissemination of general information regarding its investment advisory services to United States residents residing in states where providing such information is not prohibited by applicable law. Accordingly, the publication of GG&S’s web site on the Internet should not be construed by any consumer and/or prospective client as GG&S’s solicitation to effect, or attempt to effect transactions in securities, or the rendering of personalized investment advice for compensation, over the Internet. Furthermore, the information resulting from the use of tools or other information on this Internet site should not be construed, in any manner whatsoever, as the receipt of, or a substitute for, personalized individual advice from GG&S. Any subsequent, direct communication by GG&S with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of GG&S, please contact the United States Securities and Exchange Commission on their web site at www.adviserinfo.sec.gov. A copy of GG&S’s current written disclosure statement discussing GG&S’s business operations, services, and fees is available from GG&S upon written request. GG&S does not make any representations as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to GG&S’s web site or incorporated herein, and takes no responsibility therefore. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly.

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP and CERTIFIED FINANCIAL PLANNER in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

CFA and Chartered Financial Analyst are registered trademarks owned by CFA Institute. GIPS® is a registered trademark of CFA Institute. CFA Institute does not endorse or promote this organization, nor does it warrant the accuracy or quality of the content contained herein.

Past performance is no guarantee of future results and may have been impacted by market events and economic conditions that will not prevail in the future. This site/blog contains certain forward‐looking statements (which may be signaled by words such as “believe,” “expect” or “anticipate”)which indicate future possibilities. Due to known and unknown risks, other uncertainties and factors, actual results may differ materially from the expectations portrayed in such forward‐looking statements. As such, there is no guarantee that the views and opinions expressed in this letter will come to pass.

ACCESS TO THIS WEB SITE IS PROVIDED FOR INFORMATIONAL PURPOSES ONLY AND WITHOUT ANY WARRANTIES, EXPRESSED OR IMPLIED, REGARDING THE ACCURACY, COMPLETENESS, TIMELINESS, OR RESULTS OBTAINED FROM ANY INFORMATION POSTED ON THIS WEB SITE OR ANY THIRD PARTY WEB SITE LINKED TO THIS WEB SITE.

Relationship Summary (ADV Part 3)