Winter 2022 Market Perspectives
Happy New Year! Hopefully, you were able to spend time with loved ones and to just take some time to slow down over the holidays. This past year surprised many of us with the continued strong equity rally that started the end of March 2020, despite Covid’s persistence. The big driver of this was the reopening of the economy and the growth of corporate earnings. As we expected, consumers were back out in force last year after being locked down for much of 2020. This, along with global supply chain issues, has caused record inflation as consumers were willing to pay up for items in short supply. Much of this inflation is believed to be short-term and will ease as supply chains catch up with demand, and as demand wanes as consumers focus on services and less on material goods.
Now that we’ve had a chance to look back, this recession was like none other we have seen in recent history. Consumers were locked down and not able to eat out, or see a show, instead consumers stayed home and shopped on the internet. In a typical recession, consumers are slow in making big purchases but still tend to go out and spend money on services like restaurants. Therefore, we saw unemployment spike like never before. How can you operate a restaurant, or any other service business without any customers? In a normal recession, businesses will cut as many expenses as possible before letting people go, but this time was different. With the government stepping in immediately with enhanced unemployment benefits, it was better for many employees to take the unemployment insurance. The challenge now will be bringing these people back into the labor force after being out of work for almost two years. The Covid recession has accelerated a couple of demographic issues occurring in the United States: 1. In 2020, an additional 1.3 million Americans retired. 2. Every year, we now have 500,000 fewer 18-year-olds than we did just ten years ago. So, we have the retirement of baby boomers along with the fewer people entering adulthood. We also experienced negative population growth here in the US for the first time in 2020. It is projected that once the Millennials start having children, along with immigration, the US will experience population growth again. Long-term population growth is a big driver of economic growth. Let’s be sure to encourage our children and grandchildren to start a family!
As we begin 2022, I believe we will still hear constantly about the new variant of Covid, but it appears the lethality of the virus will continue to wane. The world economy will continue to reopen and this will lead to the second phase of the recovery which will be about experiences (traveling, dining out, movies). We will see supply chain issues slowly worked out, which will be good for both consumers and corporate earnings. This should also help with inflation as supply and demand come more into alignment. The Federal Reserve will be in the news as they begin to “wean” the U.S. economy off the various programs put in place during the pandemic. When the “Fed” is trying to tighten monetary supply, this can be bumpy, and I fully expect more volatility this year. We invest in equities as part of our long-term plan because we know that over time, they have provided investors a real return after inflation. We cannot predict volatility, though we plan for it as part of our long-term strategy.
It is hard to imagine that equities can do as well as they have these past two years, but I never make short-term predictions. I do expect to see the global economy continue a robust recovery. Much of the world has not experienced the recovery like we have here in the U.S. I saw a statistic just this week projecting in the first half of this year, the U.S. economy to be back on the path we would have been if not for Covid. That is utterly amazing that we could come this far in such a short time.
We look forward to meeting with you in 2022 and reviewing your strategy. I also would like to welcome Chetra Kem to the team here at Heritage. She and her husband have been long-time friends of Heritage even attending a few of our Skeeters baseball events.
As always, please share any questions or comments you have.
Brett S Carleton, CFP® ChFC