Outlook 2022: New Year, New Risks, New Outlooks

  • We expect the global economy (and the US + developed economies) to experience robust, above-trend (>2%), growth in 2022, which will provide a tailwind to corporate revenues with an upside risk to margins

  • A working paper published at NBER in 2018 by Erik Brynjolfsson shows that IT-related capital spending, which is properly accounted for in official productivity measures, is driving a new wave of higher productivity

  1. The implication is that economic growth could exceed current estimates and sustain higher levels of output for some time, at least in countries that have invested in IT-related capital

  2. Cyclical sectors in the US should see higher earnings growth and positive surprises, assuming that supply chain issues abate in 2H 2022 and subsequent COVID-19 variants are similar to Omicron

  • Still-high (above trend) inflation for most of the developed world due to supply chain issues (strong correlation between longer delivery times and inflation), higher energy costs related to de-carbonization of the energy sector, greater US investment in domestic production, and rising labor costs

  • We don't see sustained wage-driven inflation yet, but we see this as a key risk and driver of monetary policy in the US and Euro area

  • Speaking of monetary policy, there continues to be divergence between US, Eurozone, and Chinese rate policies that we expect to persist through 1H of 2022, which we believe will result in a stronger dollar and support export-driven nations

  • The US Federal Reserve is tapering asset purchases (decreasing the amount of liquidity injections) and will likely raise rates at least once within 1H 2022

  1. The European Central Bank expects to start tapering in Q1 of 2022 for it's pandemic related asset purchase strategy, but will continue its asset purchase program for the foreseeable future (though at a lower rate)

  2. The People's Bank of China has been easing financial conditions recently, as the Chinese economy slows under a policy of deleveraging and "common prosperity"

  • Fiscal policy in the US is receding, though the passage of a $1 trillion infrastructure package and not-dead-yet social infrastructure package will keep government spending elevated

  • Negative shocks from COVID-19 and its variants are diminishing from many developed nations, though Asia remains in a heightened state of alert due to its role as the world's manufacturer

  • While US markets are at all-time-highs, sector and factor dispersion has been violent in 2021 -- the Russell 2000 index, a measure of small to mid-cap stocks, has underperformed against the S&P 500 by nearly 50%

  • The US housing market remains in a secular growth phase, with building permits averaging above 1.5MM, and will likely drive housing-related industries higher

Our key risks:

  • Monetary policy could significantly derail growth if the Fed raises rates too quickly in the face of still-high inflation data prints

  • Outcome would be a flat-to-negative sloping yield curve

  • Covid-19 variants could end up combining the r0 of omicron with more lethal, delta-like, properties

  • Outcome would be major sustained shutdowns in global hubs, much higher mortality rates, and deepening of political rife

  • Energy costs could spiral higher, as a combination of limited investment in new capacity (due to de-carbonization incentives and policy), logistical bottlenecks, and geopolitical tensions which could drive inflation much higher

What we're watching this week:

  • A slew of economic data (PMI, Durable goods, etc.) to give us insights on economic performance, supply chain issues, and inflation

  • FOMC meeting minutes may give us insight on Fed tapering and the speed of potential hikes

  • OPEC meeting to provide an update on production

Additional reading:

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