A few predictions for 2022
Richard Barrett, Chief Investment Officer | December 31, 2021
“The art of prophecy is very difficult, especially about the future.” — Mark Twain
I have four predictions for 2022 – here goes:
- The Fed is going to raise interest rates. Maybe the most meaningless prediction in the history of prediction because the Fed has already telegraphed their desire to start hiking rates and the bond and stock market have already priced it in. The good news is the chart below (See page 2). History says the equity market can and does continue to do well even when the Fed starts hiking rates. Don’t fear the beginning of a Fed rate hiking cycle – fear rate hikes 4,5,6,7 etc. and especially fear when the shape of the yield curve inverts (2y rates > 10y rates). That phenomenon (an inverted yield curve) slows economic growth, slows earnings growth, and ultimately slows the economy into a recession. It’ll takes years, not months and certainly not weeks, to develop.
- The record money supply growth of the past two years will lead to very, very strong economic growth in 2022 and beyond. Money supply growth LEADS economic growth. M2 money supply +41% in the past two years. FORTY ONE PERCENT. After record money supply growth in 2021 we are just getting started on economic growth. Labor better, wages better, housing better…basically better will be better.
- Economic growth will drive the most important thing of all: corporate earnings growth. EDSP. Earnings drive stock prices. I think earnings on the S&P500 coming out of late FY22 will be running about $250/sh ANNUALIZED. That’s about +20% from where we are today. I think some of that has already been priced into stocks, but not all of it. We are in an earnings bull market which is driving a stock market bull market.
- Volatility returns. We’re so overdue for some extended volatility that it seems like an easy prediction to make. Equity markets can and do go down even in bull markets. 5-10% corrections happen ALL THE TIME. Let’s all reset expectations accordingly. The list of what we collectively all don’t know, don’t expect, and never saw coming goes for miles and miles. Like always, we live in a world in which there are a plentitude of unknowns. Asset allocation is everything. Own quality and be diversified. It’s a very boring strategy that works very well over time.
Source: EISI as of December 30, 2021
Retail sales are soaring…and likely GDP and earnings next
Richard Barrett, Chief Investment Officer | December 16, 2021
We’ve said for the past +20 months that the economic recovery will be a “consumer-led” recovery. It’s the consumer that got locked out when we purposely shuttered the economy in March/April 2020 to fight the pandemic and it’s the consumer that will lead out of the darkness. No better place to see how the consumer is doing in this recovery than to look at retail sales data – it is soaring. As the chart below notes, annual retail sales grow at an annual pace of about 1-5% annually since 2003. Obviously, the Great Financial Crisis in 2008/2009 hit retail sales growth hard but other than that retail sales have been gaining at an annual 1-5% clip…until now. November 2021 retail sales data out: retail sales just grew at a +18% annualized pace. That has never happened before and likely won’t look like this again. The American consumer is alive and well and doing what they do best: spending $$$.
Why are retail sales gains so important? Because US consumer spending accounts for about 70% of US GDP growth. Nominal GDP growth is what drives nominal earnings growth. Nominal earnings growth is what drives the direction of stock prices and the equity market. This explosion in retail spending should translate into nominal GDP growth for 4Q21 of about +9% to +9.5% (also growth levels never heard of prior). Nominal earnings growth should soon follow suit. Coming out of late FY2022 EPS on the SP500 should be running at an annual rate of $240ish, maybe a little higher. That’s up nearly +20% from today’s level. Higher-er.
EDSP = earnings drives stock prices. #earnings
Source: EISI as of December 13, 2021
Strong economic data but weakening sentiment and more 52 week lows
Richard Barrett, Chief Investment Officer | December 2, 2021
The broad market backdrop remains robust: housing soaring, employment levels improving, corporate earnings higher, personal balance sheets bigger, and retail spending strong. Hard to downplay just how strong the economic data has been. Despite inflationary pressures and ongoing COVID concerns, the economy remains very, very strong.
Underneath the hood looks less good. The percentage of stocks making a new 52-week low looks more like the darkest days of Spring 2020. Technically that’s not a great look – especially with the economic data looking so good. A variety of reasons for why this might be happening: Fed moving monetary policy to a far less accommodative state (tapering), inflationary pressures everywhere you look, COVID fatigue (it’s been a long 20 months for us all). The pullback in the markets over the course of the past week due to omicron is understandable – but the weakness is growing and with that, the likelihood of a classic, mid cycle 5-10% pullback in the markets. That’s the bad news. The good news is that I think we are already halfway there.
Even bull markets go backwards sometimes. Since 2009 the SP500 has had 14 pullbacks of great than -6%. Volatility happens, it’s just part of investing in equities and other risk assets over market cycles.
As of December 1, 2021
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