A look back
Adaptability. Resilience. These are two words that describe the past year. Despite the ongoing pandemic and challenges that persist, the global economy is set to end 2021 with the fastest growth rate since 1973. The U.S. is on pace for the best growth since 1984. Global equities are up double digits. U.S. stocks have led the charge, further extending the strongest start to a bull market in modern history. This outcome seemed unimaginable during the depths of the pandemic.
The massive and timely monetary and fiscal stimulus provided throughout 2020 helped set the stage for a sharp economic and market snapback. The world’s singular focus on creating and delivering vaccines and therapeutics at light speed provided additional momentum. Moreover, consumers and corporations adapted. Corporate profits, as we discussed in last year’s outlook, were vastly underappreciated and beat consensus expectations at a record pace. This theme has underpinned our bullish outlook over the past year.
However, the aggressive action taken by policymakers also had unintended consequences. The corresponding boom in excess consumer savings and the quick rebound in the labor markets unleashed a surge in demand for consumer goods at a time of constrained supply. This has resulted in inflationary pressures and supply chain bottlenecks. These challenges, along with the gradual removal of crisis-level policy accommodation, and how the world adjusts to the constant threat of new COVID-19 variants remain key themes in the new year.
A look ahead to 2022
- We have conviction that the global economy is on solid footing and will grow well-above trend. We are realistic that COVID-19 challenges remain and that access to vaccines and advanced medical care has created a bifurcated global economic recovery.
- We have conviction that the bull market will extend and that stocks remain attractive on a relative basis. We are realistic that returns are likely to be much more modest on the heels of the strongest start to a bull market in history and expect more normal pullbacks relative to the unusually shallow setbacks of the past year.
- We have conviction that interest rates are too low relative to the still strong economic outlook. We are realistic that the mounting uncertainty around COVID-19 and the durability of recent inflationary pressures – along with the subsequent timing and force of the Federal Reserve’s (Fed) response – is creating the widest distribution of potential outcomes for fixed income markets since the global financial crisis.
Economy – Well-above-trend growth but a notch lower than 2021
- Global growth set for second best year since 2010, behind 2021
- Estimate 4% to 4.5% U.S. economic growth, still roughly double the pre-pandemic range
- Key supports – Excess savings, healthy consumer, business spending, and rebuilding depressed inventories
- Inflation eases but stays above pre-pandemic level
Equity – Positive yet realistic
- Bull market extends as stocks remain relatively attractive, supported by new highs in economic output and profits
- Solid but much more moderate equity gains relative to the past two years given less policy support, range-bound valuations, and positive but decelerating profit growth
- The weight of the evidence suggests S&P 500 price returns in the range of 6% to 12%; that said, we focus more on and have greater conviction in relative opportunities than a specific price level
- More frequent and deeper pullbacks relative to the abnormally shallow and infrequent declines of the past year
Fixed income – Higher yields, higher volatility
- Set for the widest distribution of potential outcomes for the U.S. yield curve since the global financial crisis
- Anticipate one Fed rate increase, less than market consensus, as inflation cools from elevated levels and policymakers preserve a healthy yield curve
- Modest upward bias in the 10-year U.S. Treasury yield
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