On December 2nd and 3rd, 2021, the Anfield Investment Committee gathered for the 2022 Annual Economic and Investment Forum in Newport Beach for part one of a four-part series in evaluating what we believe 2022 may hold for investors.
This year’s Forum featured an impressive line-up of external speakers. Many thanks again for their participation and valuable insights:
Scott Pavlak, Managing Director at MetLife Investment Management
Bob Stein, Deputy Chief Economist at First Trust
Jason Hsu, Founder, Chairman and Chief Investment Officer at Rayliant Global Advisors
Michael Torres, Chief Executive Officer and Portfolio Manager at Adelante Capital Management
Robert Horrocks, Chief Investment Officer at Matthews Asia
Justin Barnum, Product Specialist at PIMCO
In addition, we heard topical presentations from the following members of the Anfield Investment Committee:
Jake Carnegie, Investment Analyst: U.S. Consumer
Ray Cheesman, Senior Credit Analyst: U.S. Corporate Earnings
This Year’s Themes Have Taken on a Musical Tone…
1. Let the Good Times Roll / Keep On Keepin’ On
These two classics from The Cars and Curtis Mayfield, respectively, highlight that there are many positives which, in our opinion, may play out for the markets as the global economy continues its 18-month recovery:
Interest rates—specifically the 10-year US Treasury yield—making their way towards 2% (this is a sign of a healthy economy, in our opinion)
The Fed increasing rates and finishing their tapering process (this is also a sign of a healthy economy)
A corporate tax rate that will remain in the low-mid 20’s would be welcome by equity markets
Peak inflation having been reached in 2021 and lower in 2022
A strong and even improving U.S consumer
As of October 2021, according to the Bureau of Labor Statistics, YTD gains to wages and salaries rose 7.2% - the highest level in 42 years
Strong labor market with 5 million jobs added since March 2020 and participation beginning to rise (source: US BLS)
2. If it Keeps on Rainin’, Levee’s Going to Break
This Led Zeppelin riff does a nice job of describing the predicament that the Federal Reserve finds itself in—essentially between a rock (pun intended) and a hard place. If inflation continues to come in hot (i.e. keeps on rainin’), the Fed will have the extremely difficult task of stabilizing prices while not sending the economy into a recession (i.e. the levee breaks). Going into 2022, we could see material turnover in the makeup of the policymakers determining the future path of interest rates. While we have recently gotten assurances that Jerome Powell will be returning (with Lael Brainard to be confirmed as Vice Chair), President Biden has yet to make nominations for the 3 other openings at the Board of Governors. Recall, we had 2 members resign due to stock trading activity and Richard Clarida (current Vice Chair) will be retiring in January. All to say that those who are so certain the Fed will maintain its hawkish stance (and hike 2-3 times in 2022) need to take caution as there may be more doves influencing policy than initially thought.
3. You Ain’t Seen Nothing Yet
The iconic BTO single encapsulates the unprecedented situation the global markets have gone through and are potentially yet to experience. From the rapid acceleration out of COVID, to the economy patching itself back together (with the help of the Fed and extraordinary fiscal stimulus), to the US Consumer trying to figure out when we are getting back to normal, to inflation finally sparking into a considerable flame, there seems to be a heightened level of befuddlement and wonderment of “What Happens Next?” We believe there could be a risk of disappointment as market participants consider how well the economy is actually positioned going forward. Are expectations met? Are expectations realistic? Is there enough money to spend to make potential wildcards (more on that below) irrelevant, or kick the can further down the road?
Born to be Wild(cards)….
Although all of us like to leave our favorite songs (themes) run on repeat, there are times when these songs (themes) might skip (for those that remember vinyl) or just switch quickly to an unwanted song (think free Pandora). The following are a few of what we believe may be these wildcards that could cause a skip in our favorite song repeat.
1. Will Fundamentals Finally Matter? (…again)
a. There has been a continued disconnect in our opinion between the economy and the markets. Will valuations & value finally have their day?
2. Will Europe shift to become more Pro-Russia and Pro-China, further diminishing U.S. prominence?
a. With a new leader in Germany and potential for new leaders in France, Austria and Slovenia, how do those nations decide to move forward with the United States and how do Russia and China continue to influence their neighbors?
3. The Fed Screws Up
a. The Fed’s dual mandate is stable prices and maximum employment. The challenge for next year’s voting Fed members is that inflation (prices) is at multi-decade highs while the unemployment rate sits at 4.2%—a considerable improvement from the nearly 15% rate at the peak of the COVID-shutdowns in spring 2020, but still above the pre-COVID low of 3.50% (source: US BLS). According to the US Bureau of Labor Statistics, both the prime age and total population labor force participation rates are still below their pre-COVID highs. The challenge for the Fed is curbing inflation while not tightening so much that economic growth and employment suffers. Fed Chair Powell and a potentially very different set of policymakers will have to thread the needle, and a policy error is a distinct possibility.
4. Consensus is that the Republicans will likely gain control over the House of Representatives and Senate. What if consensus is wrong? Conventional wisdom is that markets like split-government; the current base case of a blue White House, a red (or blue) Senate, and a red House is appealing to market participants who like stability. But what if the GOP cannot meet expectations, and 2022 results in larger majorities for the Democrats in both the Senate and the House?
As mentioned in the introduction, Themes and Wildcards are only Part I of a 4-part process. The next component will be our annual macro-economic forecast which is underway now and will be distributed soon.
Until then, Happy Holidays and best wishes for 2022 from the team at Anfield!
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